Around 80 per cent of companies that develop into franchises don't continue in franchising after the first five years.
Around 80 per cent of companies that develop into franchises don't continue in franchising after the first five years. Dugan Aylen, Head of Franchisee Recruitment and one of the owners at The Franchising Centre (TFC), has nearly two decades of franchise recruitment experience. He gives his top five reasons why franchisors fail.
Franchising is a desirable proposition to a business looking to grow rapidly, spread its risk and expand on a franchisee's investment capital and enthusiasm for business success. However, with franchisor failure rates being so high in the first five years – and note I’m saying here that the franchisor is failing rather than the franchise model itself, as this is key - potential franchisors need to know what steps to take (and not to take) before deciding to franchise their business.
So, here are my top 5 reasons why a franchise may fail because of the franchisor…
1. They don't know what they don't know
Franchising is often the standout option for people looking to expand their business. It allows you to expand on someone else’s money and it automatically solves the issue of who will run your new locations. You won’t find a more motivated manager than a franchisee because they are financially invested in the business.
The only problem is most potential franchisors haven't got a clue if their business is even suitable for franchising. So, once a business decides to explore the franchise model, they often seek out the help of consultants to advise them whether or not they should, or could, take the step into franchising. A good franchise consultant will be able to tell you if your business is franchise-able within 30 minutes. However, not all consultants are as ethical as those you’ll find approved by the British Franchise Association (bfa).
Some will take forward the process of franchising a business when it’s not a viable option. Unfortunately, this means they will skirt issues, avoid asking difficult questions and ignore the unfortunate answers. Because many potential franchisors will trust what an ‘expert’ says to them, they often start their journey in franchising off on the wrong foot with a business that won’t work as a business format franchise or, if they do have a franchise-able model, with the wrong advice on the steps to go about it.
To avoid this, ensure that you speak to a range of bfa-approved consultants before committing yourself to franchising your business. Get a range of opinions and quotes - you’ll be surprised at how they may vary. At TFC, we are passionate about helping businesses to franchise but only when it’s the right time. We ensure that our clients are prepared to franchise before we work with them and help to grow their brand.
2. The hidden costs of franchisee recruitment
It's very easy for consultants to entice a business owner to franchise by showing a projected business model for the next five years that looks amazing. However, often the true realities of recruiting franchisees, the marketing budget needed to generate interest, the types of experienced personnel required, or the cost of training recruits are skimmed over.
This leaves potential franchisors in the dark on how much everything will genuinely cost, how that affects cash flow and, ultimately, often causes failure.
To go into more detail on this, before signing just one franchisee, you usually need around 150 leads or enquiries. If the minimum cost to generate a lead (or enquiry) is £20, it will cost £3,000 in marketing just to secure one franchisee - if you get everything else right! Combine this with other upfront costs such as the salary or cost of the person handling leads, the direct costs and materials required to set up the new franchisee, hardware and software costs, as well as your franchisee training costs, and the outgoings soon start to build up.
Without having the knowledge of what adequate initial capital and resources are required when starting a franchise, a franchisor is set to fail from the start. It’s important to understand that it will take time before a franchisor becomes royalty self-sufficient and, in the first 12-24 months, should not be relying on that income for operating expenses and keeping the franchise business going.
3. The mismanagement of cashflow
Developing a franchise network can be expensive from the start, both in terms of management time and capital outlay. And, unfortunately, your investment can't be recovered until franchisees are appointed and you receive initial fees and then a regular income from them.
So, suppose a consultant has told you that you'll be able to bring in 10 franchisees in year one, and your business plan is reliant on this to be viable. Here’s why franchisors in that situation inevitably struggle...
With even the best franchise opportunity, a new concept can typically expect to recruit anywhere between zero and five franchisees in their first year. This is simply because you need a very specific type of person, and someone who is more open to risk, to invest in a new franchise model, and there are less of these people around.
If businesses are expecting or relying on 10 franchisees to come on board within the first year, not only will the majority be greatly disappointed, but they will also need a considerable pot of cash to compensate for their lack of expected income. This is a big blow to many new franchisors and can often lead to them having to give up on franchising before they've even really started. That’s not to say some brands cannot grow more quickly, but many things need to be in place along with a healthy and realistic budget, and a very good strategy.
4. Recruiting the wrong profile of initial franchisee
Instead of taking the time to recruit the right person, franchisors often get caught up in the financial forecasts, bringing in franchise fees and selling their initial franchises to anyone that has the money to invest. However, taking on the wrong profile of franchisee at the start of their franchising journey can be the beginning of the end for some brands. Ensuring the first few franchisees brought into the network have the right mix of collaborative and entrepreneurial spirit is critical as they will help further shape the franchise model as the franchise network grows.
You're essentially asking the first few franchisees to give you a chunk of money, often quit their job, give up the security and benefits that go with that, and embark on a new journey with you. So, it's important new franchisors don't leave their first few franchisees feeling mis-sold to and that they understand the risks. Of course, they will get all the support from your business, but it won't all be plain sailing from the get-go. So, new franchisors must always be direct, transparent, open and honest with their first few franchisees, that this is a work in progress.
The support for the next batch of franchisees will be structured differently for franchisee number six, seven, eight, and onwards. This is because they will receive a more 'normal' franchise experience. You will have to ensure you have more tried-and tested-training systems in place before recruiting this batch of franchisees as, at this stage, anything less can undermine your position as the franchisor.
5. Choosing the wrong digital marketing strategy
Many franchises fail because their franchisors don’t implement effective digital marketing strategies from the start. You could have the best business, offer the best products and sell at the best prices, but you won't succeed if no one knows about you. This is why it's crucial to have a strong digital marketing strategy.
Franchisors that ensure they have quick and easy-to-use websites, creative and engaging social media platforms and great SEO in place are far more likely to succeed than franchises that don't. Also, the digital marketing strategy to find customers for new franchisees will almost always be a world away from the marketing strategy that helped the original business develop in the first place, and there are many reasons for this.
Even with an acknowledgment that an effective 'out-the-box' digital marketing strategy is needed, the biggest problem that franchisors face when looking to outsource the build of this digital marketing strategy is the sheer volume of agencies available in the UK. So, how do you choose the right one?
My advice is always to try and find a marketing partner with good franchise experience. This is fundamental to having an effective relationship with your digital marketing agency, who can help your franchisees build up the business and reach more clients. If the agency doesn’t understand the quirks of the relationship between the franchisor and franchisee, they often mismanage expectations and deliver a poor service that negatively affects franchisees. Narrow it down to agencies that can boast experience of working with franchises and move forward from there.