Though buying a franchise carries less risk than starting a business from scratch, like any business start-up, franchise businesses too can fail if not run properly by either the franchisee or the franchisor.
The realism is that many franchises have failed in the past and many more will do so in the future. This is not be a scare tactic to put you off buying a franchise, but more a warning that you need to do your due diligence to make sure that you are buying into a franchise that is right for you and has the potential to be successful.
Unfortunately there are bad franchises as well as good franchises out there with franchisors concerned only about expanding quickly to make money with no real plans for longevity. If you do your due diligence properly then you will be able to spot these rogue franchises.
Below are some reasons why franchises can fail.
No systems in place
Franchising revolves around systems. Franchisors need to have good systems in place in order to replicate the success of their business through franchising. If the business has no systems, or relies solely upon the skills of individuals, then it cannot be franchised.
A good franchise business has everything documented and systemised so that they can pass it on to other individuals to follow and be as successful as them. Most franchisors do not require franchisees to have experience in their industry as they will be trained in how to follow the systems.
No track record
We have been approached a lot at exhibitions by people who have an idea for a business that they want to set up as a franchise! These are usually people greedy for instant success and concerned only for building a “franchise” up quickly and making money. A business needs to be running successfully before it can be franchised. Make sure that your franchisor has a good track record of running a successful business.
All franchises have to start somewhere and so if you are one of the first franchisees, then this should not be an issue if they have evidence of the business being run profitably before being franchised. A good franchisor will have run a pilot franchise to make sure that the business can be franchised and to help iron out issues that may arise before it is rolled out as a franchise.
Location, location, location
Getting the location right is not just relevant to someone buying a house, but also to buying a business. Though not all franchises need to be based in prime locations e.g. some are home based, office based or mobile franchises, if you are however buying a retail franchise which relies on footfall, then you need to be in a good location. Your franchisor needs to be able to get you premises in a popular area. Even some of the bigger franchises such as McDonalds would not do well if in a poor location, though a not so well known franchise would do well if in a great location. Being in a prime location is key factor in being successful. A good franchisor will spend time finding the right location for you.
Lack of marketing
An established, well-known franchisor will undertake national marketing to continue to promote the brand throughout Australia as well as some local marketing to create awareness in your area for your franchise.
Smaller franchises require more marketing as they are not as well-known and so the franchisor should have a marketing plan in place to help promote and gain recognition nationally as well as locally. If a franchisor has not got a marketing fund, then they will struggle to promote the business and win customers. Without any brand presence, the franchisee will just become like an independent and not benefit from being part of a franchise network. Franchisors should contribute some of the money the get from selling a franchise to a shared marketing fund. A good franchisor would see the long term benefits of doing this, a bad franchisor that is just out to make as much money as possible in the quickest time, will not want to invest their money in this.
It is therefore important that you ask the franchisor about their marketing plan and how they will help promote you.
Check your local market to see what competition there is for the product or service you would be selling. If no one else is doing it then you need to look at whether there is a market for it and equally if there is lots of competition, then it could be hard for you to gain market share. Look at your competition and what they offer and compare it to what you would be offering and if you have any competitive edges over them. Having a USP would help your business to stand out but if your franchise business would be offering a similar or inferior service to everyone else, then you could struggle.