Understanding Franchise Failure Rates and How to Lower Them

Franchise Failure Rates

Franchise Failure Rates can be Lowered

The franchise industry has grown tremendously since the 1980’s because its value proposition is unparalleled. That is to say, if parties handle all things properly. And, of course, ‘all things’ means franchisor, franchisee, supplier, and consumer. Unfortunately, failure among franchisors and franchisees alike has been a demon accompanying industry growth. Two key factors, lack of planning and psychology of the industry, contribute greatly to that failure.

Planning is Factor One in Avoiding Failure

For Franchisors

Franchisors fail at a much higher rate than is realized outside of the industry. And it’s their pre-franchise planning that is often the cause. The Bibby Group insists on a true feasibility study before the decision to franchise a business is made. It’s the only fair and logical way for a prospective franchisor to learn about franchising. But it’s also about how the proposed business and the business owner might fit within the industry. Unfortunately, feasibility is often just a hurried phone call with a consultant that praises franchising as a printing press for dollars. This happens because both the consultant and the prospect want to get things going. What’s require is analysis of the entire business and its people.

It’s a simple fact of life that most franchise development consultants still operate in the mode of selling their services. Obviously, real feasibility discussions point out the expenses, commitments and potential pitfalls of franchising.  That would hinder the sale of consultant services.

Post feasibility, careful planning should touch on strategy, organization, legal work and the most important of all, learning to be a franchisor. With all the preparation in the world, if a franchisor does not understand how to fulfill their role, they will most likely fail. Along the way, franchisors create their own brand of misery while giving birth to unhappy franchisees.

For Franchisees

Franchisees also fail due to lack of planning and in their case it’s a total lack of concern, or a refusal to conduct proper franchise due diligence. They refuse common sense due diligence before buying because, just like the franchisor above, it’s easier not to do the necessary homework and planning. Believe it or not, most franchise owners really don’t know what they’ve purchased until after they take ownership of their franchise. In many cases, long after. Why is this so? Because most franchisors make purchases on emotion, not research. Many franchise brokers earn a fine living in franchising due to this fact alone. Be smart, retain competent due diligence assistance if you’re buying a franchise.

Psychology is a Large Factor in Lowering Franchise Failure Rates

Once again, both sides of the equation, franchisors and franchisees, fail because they fall prey to a similar problem; the psychology of franchising.

Franchisors often get started because someone sells them on franchising their business. We’ve addressed this issue many times, but even those who have heard or read our advice will often not pay attention. They run themselves into the ground on the clever words of encouragement and/or salesmanship. And that salesmanship can come in many forms. It’s often a consultant but just as likely be a friend, customer or family member suggesting that a business would make a great franchise. Just because those folks might like a person and their business, they don’t know what makes a great franchise. Their words of encouragement start some serious thinking in the minds of business owners. The idea of franchising is intoxicating to entrepreneurs and they are prone to place emotions ahead of practical, logical decision making.

Franchisees, as stated above, tend to buy franchises based on emotion, on glitter, on the idea of a so called hot business opportunity. Those are all the wrong reasons for getting into franchising, but they are clever culprits and they win more than they lose. Smart buyers should first determine whether franchising is a good emotional fit with the framework of a dictated system. And smart buyers also look into what type of business might best fit who they are as a person. That’s why we produced The Focus Program for Emerging Entrepreneurs.

Planning and psychology are the two key elements that usually play a role in both franchising failure and/or franchise success.