According to the U.S. Bureau of Labor Statistics, one out of every five businesses fail within the first year. Nearly 50% go out of business within five years. However, the rate is significantly lower for franchisees, with some studies showing that fewer than 5% fail within the first year.
That makes sense because, in most cases, franchisees follow proven and successful models and practices by popular brands that have been around for a long time. Still, operating a well-known and thriving franchise is not a guarantee of success, and some franchisees struggle from the outset. Here are a few reasons why.
It is the wrong idea or franchise
Researching a franchise system is crucial to grasp how the community will receive it. Many believe they will be automatically successful by buying into a fast food chain. Fast food franchises may have universal appeal, but not all brands are popular, or the market may be saturated with competitors.
Another key component is operating a franchise with a business model that is easily understood and duplicated and includes extensive support and training for franchisees and their employees. If the concept is complex or too vague or franchisor support isn’t available, the chances for success are less likely.
It is in the wrong spot
Seasoned franchisees see “location, location, location” as a crucial component. Even the most popular and successful franchises may not be destined for success if they are set up in isolated areas or places inconvenient for consumers to reach, such as in a shopping center with low visibility or on a metered city street with limited parking.
Too many competitors
Over 750,000 franchise establishments exist in the U.S. in various industries. If your heart is set on opening a franchise restaurant, but your market is full of similar options, you might want to consider a brand that offers a dining choice or type of fitness or massage business that is not already tapped out or another product or service that is not provided in your area. You may also face competition from other franchisees of the same brand. Many franchisors limit the number of franchisees in a geographic region, but some do not.
They do not follow the system
American business owners have historically been regarded as independent and creative entrepreneurs. But franchising is not a venture best-suited for mavericks. Franchisees are typically more likely to succeed when they follow the company’s procedures and systems. A central reward of being a franchisee is taking advantage of these proven methods.
They cannot or will not put in the time
Owning a business is nothing less than a full-time job, regardless of whether you start a company from scratch or become a franchisee. Expect to work long hours, especially at the beginning, while you are training staff and learning the ropes. Failure is more likely if you try to keep another job, have family considerations that require a substantial chunk of your time, have significant health issues or anything else that takes your attention away from your franchise. The idea of “absentee ownership” may sound appealing, but often it is a ticket to failure.
They have unrealistic expectations
Too many prospective franchisees believe that owning a well-known and recognizable brand, provides them with instant success. But remember that you will pay more up-front and later on for the more popular franchises. In many cases, it can take several years to turn a profit.
They lack the necessary funds
Some people scrimp and save to raise the capital for a franchise fee and other initial expenditures to open the business, but they do not have enough cash to absorb additional costs, working capital or ride out economic downturns and other challenges. Some new franchisees find they can’t afford to pay for local marketing or employ the number of managers the franchise model requires.
They lack patience and grit
Part of being a business owner is knowing that situations will arise over which you have no control, such as a recession or a pandemic. Many franchisees were doing very well when the Covid 19 pandemic hit, but a sizable number of them could not survive. Those who understood the risks going in had contingencies in place and worked with franchisors to weather past the rough patches. Those who survived understand that more challenges will likely arise.
What if I want out?
For some, this once-promising opportunity to fulfill their dream of becoming a business owner can turn into a nightmare, and they want to cut their losses and move on. However, they must understand how termination works under the franchise agreement. These documents are typically thorough and weighted in favor of the franchisor. It is vital to understand these provisions before signing the franchise agreement.
Unless you can prove that the franchisor breached the contract by not holding up their end of the agreement or did not disclose or misrepresented critical information about the franchise, your likely options are to sell or transfer the business or ride it out until the contract ends. In many cases, you can ask the franchisor for help by providing additional training or renegotiating the territory if the location is hurting your bottom line.
What is the most crucial factor for a successful franchisee?
In short, it is you! While we have outlined many of the challenges and roadblocks to success, successful franchisees understand that the attitude they bring and the qualities they possess will primarily be the difference between success and failure.
It is also essential to understand that most prospective franchisees are not blindly wagering all their savings on a whim to be successful. Most educate themselves by working with an experienced attorney who understands the legal requirements and nuances of franchise law.
Franchising remains one of the most efficient and fulfilling ways to achieve your dreams of business ownership. Your attorney can help identify the potential risks and help ensure that you understand the rules and requirements of being a franchisee. It is a formula that has worked for countless successful business owners.