Investing in a franchise can be an exciting opportunity to become your own boss, diversify your portfolio, and build a profitable business based on a proven model.
However, the unfortunate reality is that there are a few new franchises that fail within their first few years. Even with this in mind, I firmly believe that franchising is a safer investment than a start up on your own. Growing up in a family business, I have seen the pitfalls of being on your own first-hand. In a franchise, the proven business model, a team of support, as well as a group of like-minded supportive franchise owners are there to help make you a successful franchisee.
In this article, we’ll examine three key reasons this happens – and more importantly, share actionable strategies to help aspiring franchisees avoid these pitfalls and achieve long-term success.
Pitfall #1: Undercapitalization
One of the most common reasons new franchises fail is simply running out of money. Eager franchisees often underestimate how much runway they’ll need before their business becomes profitable.
They may have the startup costs covered, but lack sufficient reserves to handle the ongoing operating expenses during those crucial early months. Being overly conservative may cause you to not be prepared for the unexpected.
How to avoid undercapitalization:
- Scrutinize the Franchise Disclosure Document (especially Item 19) to get a clear picture of typical operating costs and time to profitability. Ask other franchisees if they had enough funds for the first year and if not, how much more additional would they suggest. Validation is key here!
- Consult a financial specialist to ensure you have sufficient funding for both startup costs and working capital.
- Create a realistic personal financial plan to cover your own living expenses until your franchise becomes profitable (e.g. living off savings, operating as a side hustle initially, relying on a spouse’s income, etc.). It does take time for revenue to be generated.
Pitfall #2: Poor People Management
For most franchises, your employees are the lifeblood of the business. Challenges like high turnover, low productivity, and a disengaged team can be extremely difficult to overcome.
This is especially true for executive franchise owners who are relying on their staff to handle day-to-day operations.
How to master people management:
- Communicate a compelling vision that helps employees find meaning and satisfaction in their work.Build culture from the beginning and be sure you are representing/ upholding that culture as well.
- Take time to hire the right people; don’t rush to fill seats with subpar candidates. Fill the seats with people who have character (integrity), chemistry (with the team), and competency (know things but more importantly are teachable). This will ensure the culture is hired for as well.
- Give your team opportunities to learn, grow, and have a voice in the business.
- Treat mistakes as coachable moments, we all make mistakes and appreciate the chance to learn and grow..
- Foster open communication; lead out with questions and make it clear you genuinely want your team’s insights and feedback.
- Stay engaged with the business, even as an executive owner; you can’t hold your team accountable if you’re never there.
- Pay competitively and provide appealing benefits; even the best culture can’t make up for sub-par compensation.
Pitfall #3: Failure to Follow the System
When you become a franchisee, you’re gaining access to a proven business model, not just a brand name. It’s the reason you didn’t go and start your own thing and bought in to get you much further down the road from the start.
The franchisor has invested significant resources into developing and refining their systems. Your success depends on your ability and your team’s willingness to follow their playbook.
However, some franchisees struggle with this, especially those coming from an entrepreneurial background. They start to deviate from the system bit by bit, thinking they know better. Straying too far off script can lead to costly mistakes, contractual issues, and even the possible loss of your franchise license.
How to stick to the system:
- Take time during due diligence to thoroughly understand the franchisor’s processes, support resources, and operating guidelines.
- Look for franchisors that provide robust training, clear documentation, and ongoing mentorship to help you master their system
- If you want some input to suggest improvements, consider partnering with a newer franchise brand that’s open to collaborative refinement.
- Be honest with yourself; if you’ve always had a tough time following rules and processes, franchising likely isn’t the right fit.
Final Thoughts
Investing in a franchise can be immensely rewarding, both personally and financially – but it’s not without risk.
By understanding the top reasons franchises fail and implementing these proactive strategies to avoid those traps, you’ll dramatically increase your odds of long-term success.
With the right planning, people management, and commitment to proven systems, you can turn your franchise ownership dreams into a profitable reality!
Ready To Explore Franchising? Let’s Talk!
Mack and Sharon Strange are on a mission as Franchise Consultants to help others go from “Start” to “Success” when it comes to franchise ownership.
If you’re curious about exploring franchising as a career pivot, investment vehicle or lucrative side hustle, let’s talk!
Frequently asked questions (FAQs)
Q: How do I book a call?
A: You can book a free, no obligation call with Mack here and/or a free call with Sharon here.
Q: How much do your services cost?
A: As Franchise Consultants, there’s no fee for our services. We’re compensated by franchisors only if and when you decide to move forward with (and are approved for) franchise ownership.
Q: What do you do?
A: Our role is to serve as a trusted guide and educational resource.
Q: Where can I learn more?
A: You can learn more about our story and how YOU can follow in our footsteps via the Franchise Together Podcast.
We look forward to connecting with you soon!