The Reasons Why Startup Franchisors Fail
by Ed Teixeira
Business owners that are considering franchising their business should
understand why a startup franchisor can fail before taking the plunge.
Recently I wrote an article entitled,
Franchisees Fail. The objective was to present key factors, that can lead a
new franchisee to fail. My expectation is that individuals armed with this
information can make more intelligent decisions when choosing, evaluating and
purchasing a franchise. If an existing business owner is considering
franchising their business then understanding why a startup franchisor can fail
will provide a clearer perspective of what is key to success. Although data on
the number of new startup franchisors is solely lacking, so too is which startup
franchisors fail and why, here are my reasons.
Reasons why a startup franchisor can fail:
1. The business is not an appropriate model for franchising.
Simply stated the business canít be built into a successful franchise model. At
the very beginning of the franchising evaluation process, itís important to be
cautious and objective when evaluating a business for a franchise. This means
not relying solely on the analysis and opinion of a franchise consultant.
Rather, you should do your homework and independent analysis. Consult with your
financial and legal advisors and request they provide you uncensored feedback.
Remember, if there are no franchises that are similar to your business, there
could be a good reason why and it may not be because youíre smarter than others.
Related to this issue is that the franchise model must be based upon a
well-tested business with no major unsolved operating problems.
2. The business owner and staff lack the business skills to operate a
franchise system. This situation can manifest itself in several ways
including the inability to lead or manage a multi unit organization. There needs
to be management staff in place or in the wings that can help to operate the new
franchise plus the existing business. When a business goes from one company to
two management will be operating two separate businesses.
3. The business owner doesnít fully understand the implications of
franchising a business and what it takes to be successful. See my
When Franchising Your Business Temper Expectation that draws some
similarities between new franchisor expectations. The allure of franchising is
such that a business owner may only see the success stories and not the
failures. Developing and launching a successful franchise program, requires the
right ingredients. Unfortunately, a good deal of emphasis is placed upon
building the franchise and not the launch and development of the system. The
next point presents a key.
4. The franchise model is appropriate and can be successful developed,
however, there is a lack of capital necessary to build, develop and operate the
franchise. A major reason why a startup franchisor fails is a lack of
capital to sustain the business during the launch of its new franchise. An
often unanswered question is, if a startup franchisor had sufficient working
capital could that enable them to overcome some of its shortcomings? Perhaps
some could and others couldnít. Some startup franchisors lack the working
capital they need to launch and grow their new franchise. The cost of building
the new franchise program including consulting and legal fees can cost as much
as $100,000 or more! And this is before any funds are spent on advertising,
processing and closing new franchise transactions. A number of startup
franchisors burn their capital on the building stage and when it comes to
marketing and supporting new franchises the new franchisor lacks the necessary
funds to continue.
The bottom line: Business owners that are thinking of franchising their
business need to be cautious and understand what it takes to be successful.
Understanding the reasons why a startup franchisor fails should be foremost in
the minds of those considering the franchise route.
© 2013 FranchiseKnowHow, LLC
Ed Teixeira is the President of FranchiseKnowHow, LLC. He
can be reached at firstname.lastname@example.org