There are many paths franchisees can take to success as a business owner, but just as many that will lead to an unsuccessful business venture.
Jason Gehrke, director at the Franchise Advisory Centre, shed some light at the recent Brisbane Franchising expo on the top five reasons why franchisees’ businesses collapse and how to avoid failure.
1. Insufficient research
When franchise buyers skim on research, they increase their risk of financial loss. Research includes understanding what due diligence is, obtaining legal advice from a franchise lawyer, reading the documents (franchise agreement, the Franchising Code of Conduct, and disclosure document), speaking with current and local franchisees, and attending expos.
By not developing professionally, potential franchisees increase their risk of failure in the business as it may not be suitable for their skills and expectations. In the same way, they might not be suitable for the business model.
Rule of thumb: Gehrke says a simple formula is that per $1000 spent on a franchise, buyers should invest one hour of research as outlined above.
2. Inadequate business planning
A proper business plan needs to be a bespoke roadmap to performance: daily, weekly, monthly and annually with a clear marketing and sales plan. Franchise buyers too often go with a tokenistic plan written by an accountant or rely on the franchisor’s tools (i.e their marketing plan). As skilled as an accountant is and as helpful as a centralised marketing plan can be, a business plan needs to be unique to the franchisee and their projections for their business’ performance.
3. Insufficient monitoring and modification
Successful franchisees are always keeping their business in check. They monitor it religiously and ruthlessly; hourly, daily and weekly – not annually! A franchisee should be checking up on how the business is going and make incremental modifications as opposed to catastrophic, end-game changes. Franchisees should benchmark every aspect of the business and work to reaching those benchmarks.
4. Not following the system
Potential franchise buyers need to acknowledge the nature of the business they are choosing to invest in. Policies and the operations manual exist for a reason – they are meant to be followed. A franchise business is not designed for an entrepreneur looking to beat to the sound of their own drum.
That’s not to say new ideas are not welcome in a franchise network.
Gehrke cites the Filet-O-Fish burger as a franchisee’s idea which was then streamlined by the McDonald’s franchisor. Innovation is possible within a franchise network, but by working with the franchisor and leading from within the system. Compliance and engagement go hand in hand, and franchisees need to be aware that the weak link can get cut from the chain.
5. Complacency
“When you run a business, you start at $0 every year,” says Gehrke. Franchisees essentially get what they put in, they are not provided a starting salary as they would if they were a full time employee.
Many franchisees fail because they take their money for granted and lose the hunger to grow. Some franchisees step back or out of the business. Less engagement means poor results and owner-operators are often the most successful franchisees.