In this blog we’ll examine the top 7 reasons franchisees fail, and by the end of it you will understand the danger signs.
1. Fail to plan
Failing to plan is planning to fail. The life of any business owner is a journey, starting from day one and ending when the business is sold, handed down or whatever.
A journey from Brighton to Inverness is made a lot easier with a map. In the same way, getting your business from where it is to where you want it to be needs a road map. A map that shows the route to achieve the profit and value you want. Without that guidance you are running blind.
2. Run out of cash
The most common cause of all business failure. Cash flow and profit are different. Understanding that can be the difference between surviving and failing.
Even if your business is profitable, it can still fail if its customers have not paid on time. It will run out of money to pay its own bills when they fall due.
3. Spend it all instead of reinvesting
If you don’t reinvest profits back into the business in a sensible and progressive way, one day you will need to spend a load on something unexpected and the cupboard will be bare.
4. Do the exciting stuff and ignore the numbers
Business owners who fail to get to grips with the financials are guilty of gross misconduct. Businesses have three functions – doing it; selling it; managing the money. It’s like a three-legged stool – take any leg away and the whole thing will fall over.
The financial stuff is the area in which franchisees are least likely to be experienced or interested so that’s the one that gets ignored. That is always a fatal mistake.
5. Employ incompetent staff
If you train your employees in the nuts and bolts of the operational stuff but don’t bother to create a group of people that cares about the success or failure of the business, that business will never achieve much.
6. Pay too much rent
Rent is usually the biggest fixed cost. New franchisees often tie themselves into leases that are too expensive, and high rents can put you out of business very quickly.
Unless your franchise has an extremely profitable site in a great location, your rent should ideally be less than 7% of sales. If it’s 9% or over – be very careful.
7. Buck the system
Successful franchises are successful for a reason. Some franchisees think they can do it better and instead of following the franchise system, they try to do their own thing.
Good franchisors will take their franchisees’ ideas on board. However, if some of the ideas are completely at odds with the brand offer and values then they won’t work within the franchise model.
The franchisee may as well have bought an independent small business instead.
So there you have it. How many of these indicators apply to you?
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Chris Martin is a chartered accountant and business advisor and has been helping franchisees create and grow wonderful businesses for over 20 years. He is a published author and has written extensively on franchisee tax issues. He passionately believes that whilst franchising is a deservedly successful business format, franchisees are often let down by their franchisors’ failure to offer support and guidance regarding the financial side of running the business. This leaves franchisees frustrated, overwhelmed and unable to grow their businesses to the extent they should. Chris has developed simple systems, support and guidance to ensure franchisees create businesses that provide them and their families the lives they so richly deserve.