Planning, capital and the ability to adapt are all important for franchisors to avoid failure.
Franchisors have a unique challenge ahead of then as soon as they decide to franchise their business. Growing nationally–and even internationally–may be the dream, but getting there requires adequate planning, resources and the ability to adapt to changes in the marketplace.
These top seven ways that franchisors fail should serve as a warning to brands in the franchise industry.
1. Not vetting franchise candidates or prospects properly. Instead of awarding a franchise to the right person, franchisors get caught up with bringing in franchise fees and selling their franchises to anyone that can write a check.
“If you bring in someone who’s a bad fit, they won’t do well and then they don’t validate. This will kill your sales without validation and eventually that franchisee will close. If you have closures and a handful of franchisees that don’t validate the system, you can’t continue to sell more franchises and that’s when the franchisor will fail,” said Sean Fitzgerald, No Limit Agency* Chief Development Officer.
2. Lack of funding. “Brands make the mistake of not thinking about the fact that this is a marathon and not a sprint. They need the capital to market the brand, onboard franchisees, train them, send people out for real estate selection and so on. That’s when they start to take shortcuts,” said Tom Parks, President of Premier Franchise Solutions. Without adequate capitalization and resources, a franchisor is set up to fail from the start. It will take time before a franchisor becomes royalty self-sufficient and is not relying on that income for operating expenses and keeping the lights on.
3. Forgetting they are in the franchisor business. Fitzgerald explains, “Being a franchisor is a completely different business than what most are used to when they get started. The same type of strategies and tactics that made them successful typically do not apply to franchising.” Not only do you have to think of how to run a business, you have to think of how to run a franchise business.
4. Lack of Planning. One part of being in the franchisor business is coming up with training programs, manuals and systems that can be replicated by franchisees in order for them to have success with the business. Franchisors must perfect these systems and be able to train their franchisees on them.
“One of the benefits of being a franchisor compared with other businesses is that the process forces most companies to become rigorous in how their business operates. The discipline is helpful for them and their franchisees,” said Carl Zwisler, franchise attorney at Gray Plant Mooty.
5. Expanding too quickly. This is a problem that relates back to awarding franchises to the wrong people. Franchisors need the right people as franchisees and they need to choose the right markets to expand to where they can be there to support when things inevitably go wrong. While many franchisors get started franchising and hope for a hundred franchisees in the first year, most do not have a plan to be able to support that. Preparing for expansion is just as important as selling your prospects on signing on with the brand.
6. Not budgeting enough for marketing. “Everybody thinks that everyone will be lined up to buy their franchise, but if it’s a brand based in Chicago, I may not have heard about your brand. How will you get new people to come and look at your brand and be willing to invest?” said Parks. Since buying a franchise is one of the biggest decisions a person will make in their life besides buying a house, you will need to plan for marketing your concept to new markets and prospects.
7. Not adapting. Franchisors often become complacent with a system that is working. Whether it is market conditions, competition or natural disasters, they must be able to adapt the brand to continue to succeed in the current environment. “While you can’t anticipate everything, finding the best way to face those challenges is often difficult for franchisors. If they can’t adjust, they won’t succeed,” said Zwisler.
Fitzgerald says that when a brand is no longer competitive, it will lead to store closures and eventually the entire system breaks down. “At some point, they had a good system and product offering to get them to that size, but something along the way happened and they never adapted to market conditions or improving the system and they got complacent.”