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UNDERSTANDING WHY FRANCHISEES FAIL WILL HELP

YOUR EVALUATION PROCESS

By Ed Teixeira

Ask any expert about buying a franchise and they will always recommend that you speak with existing franchisees before you make a decision to purchase a specific franchise. However, it’s important to know what questions to ask. Understanding why most franchisees fail can lead you to ask the right questions.

Read any book or article pertaining to buying a franchise and the writer will always recommend that you speak with existing franchisees before you make the decision to purchase the franchise. This is sound advice and certainly makes sense.

It’s also important to know what questions you should ask franchisees. At the core of the problem, it’s important to understand the primary reasons why franchisees fail. Having this knowledge will contribute to a thorough and productive validation process of a particular franchise. Here are the most common reasons for franchisee failure followed by some suggested questions:

The franchisee lacks the necessary working capital to operate and sustain the franchise at the proper level. Therefore it may be unable market for business.

  •  How long did it take to reach break-even?
  • Were there expenses that they didn’t anticipate?
  • Were the start-up costs consistent with the FDD investment schedule?

The franchisee lacks the business skills and tools to successfully operate the franchise. As an example, some franchises require strong selling skills. Without these tools, success will be hard to achieve.

  • What are the most important skills needed to operate this franchise?
  • In terms of operating this franchise, were there requirements they didn’t anticipate?
  • Was it difficult finding qualified staff for their franchise?

The franchisee has unrealistic expectations. He or she may believe that the franchise is easier to operate than it really is.

  • How many hours do they work at the franchise?
  • When they started up the franchise did they find it more difficult than they expected? If yes, in what areas?
  • What have they found to be the most significant challenges in operating this franchise?

There is a lack of demand for the product or service.

This could be the result of the market or the franchise territory being too small. In some cases franchises may be too close together.

  • This is a very critical area, since hard work and added capital can’t overcome a lack of demand. Be sure to fully question the franchisor regarding how and why they configure the territories the way they do.
  • Ask franchisees if they think their territory is large enough to allow for current and future growth?
  • Are they satisfied with the way their territory was defined?

The franchise program is flawed. In this situation, the sales and/or gross margin dollars needed to meet expenses, including paying royalties may be difficult to achieve. It may require extraordinary performance to be profitable.

  • Be sure you or your accountant calculates your pro-forma income, projected cash flow and break-even statements.
  • Ask the franchisee if their franchise has met their financial expectations. If not where did they fall short? Was it operating expenses, sales and/or gross margin? Try to gain as much information as possible about this subject by asking open-ended questions.

The franchisor fails to properly train and support the franchisee. In time of need the franchisor fails to respond.

  • Determine if the training program was presented as described in the FDD.
  • Were there any activities pertaining to operating the franchise that weren’t presented in training?
  • What part of the training program was satisfactory and what parts fell short of expectations?
  • Was there proper support after training?

Although there may be other reasons that cause or contribute to a franchisee being unsuccessful, these are the most prevalent. Understanding what may be an impediment to being a successful franchisee will better equip you to evaluate a specific franchise opportunity.

2015 FranchiseKnowHow, LLC

Ed Teixeira is the President of FranchiseKnowHow.com and Chief Operating Officer, FranchiseGrade.com. He is a former franchise executive and franchisee. He can be contacted at 631-246-5782 or at  franchiseknowhow@gmail.com

 

 
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