Eight Common Reasons Why Franchises Fail


Buying a franchise doesn’t automatically guarantee success; commitment to developing the skills needed to manage a business is key.

Aspiring entrepreneurs who want to avoid the high risk of failure associated with small businesses often look to franchising, assuming that a recognised trademark and support is a guarantee of success. Although it is true that franchises have a higher success rate, it is not true that they cannot fail.

As it is the case with other businesses, there are several reasons why franchises fail, says Ethel Nyembe, Head of Small Enterprises at Standard Bank. “Enhancing your chances of becoming a prosperous franchisee can depend on addressing the common issues that can impact on a franchise by addressing them upfront.”

“One of the primary reasons franchises fail is because potential franchisees often rely too much on the professional assistance and systems supplied by franchisors. If you are going to own a franchise, it is essential that you develop the financial and accounting skills necessary and back them with intimate knowledge of all the operations that make up the business. Being a franchisee means being able to act as the HR manager, accountant and marketing guru, and everything in-between.”

Common reasons why franchises fail:

  • Not enough working capital. Outlets, especially newly-opened shops, need operating capital until positive cash flow is achieved. Underestimating how much money will be required and having this compounded by several months of slow business while the outlet becomes established can be a death knell for the business. Making sure that there is a financial buffer in place when the business kicks off can prevent sleepless nights.
  • Lack of franchisor support. The time a franchise has been in existence is usually a good indicator of franchisor support. However, new franchise operations are constantly being developed. If you are considering one of these opportunities, make sure to visit existing franchisees and ask them for their honest opinions regarding the support they get from their franchisors.
  • Not all franchisors are equal. Most potential franchisees expect their backgrounds and financial strength to be examined when they are being considered for a store, but it also pays for a franchisee to put the franchisor under a microscope. If documents and procedures aren’t standardised, staff seem uncertain. Moreover, if existing outlet owners aren’t impressed with the systems or support available, there is a good chance that the franchise won’t succeed.
  • A ‘mismatch’ between the personal characteristics of a franchisee and the business. If, for example, a franchise requires a ‘people person’ who is constantly visible to customers, but the franchisee prefers sitting in an office doing the books, control of the business will be easily lost.
  • Underestimating the amount of work required. Committed franchisees usually find themselves spending long hours at their store and doing work they normally wouldn’t consider doing, including manual labour. To avoid this, make sure that you understand everything involved in a franchise. Better still, spend some time working at an outlet (even without pay) to get a true idea of what is involved.
  • Hiring unsuitable staff. Having the wrong people in the wrong jobs places an enormous strain on a franchise. Opening a new outlet with staff that are trained and have been assessed is essential for building a successful business.
  • Having an outlet at the wrong place. Franchised outlets, especially quick-service restaurants, must be in high-traffic areas or be strategically situated in shopping centres or malls. Although franchisors usually find sites, taking time to observe traffic and talking to other shop owners about their experiences is wise for potential franchisees to do.
  • High store rental costs. There is a price to pay for having the right location. As rent is a major part of any business’ costs, all rental agreements should be scrutinised.  Long-term contracts with annual escalation clauses may place an insurmountable financial strain on a franchise outlet.

“There are many pitfalls to watch out for when launching a franchise,” says Ms Nyembe. “But, once you are aware of all the business risks, you can take steps to lessen or avoid them completely, significantly increasing your chances of commercial success.”

Press release by Magna-Carta.

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