Yes, the number of franchise failure is a lot lower than traditional independent business failures. Becoming a franchise owner is an excellent way to get all the benefits of business ownership without many of the risks involved with starting out on your own.
However, zero risk does not exist, and franchise failures can happen.
There could be many reasons for a franchise to be unsuccessful. However, the following 5 factors are the most recurrent common reasons.
1. Do you have the right business skills?
When people invest in a franchise, it’s often because it is a proven system with a strong brand name, training, marketing, systems, operating manuals, and support.
Now there’s no doubt that this is a significant advantage in the market, but it would be naïve for a new franchise owner to solely rely on these features and expect to have a successful business.
A franchisee’s own competences and business acumen play a considerable role in business success and will transform an average operating franchise business into a highly profitable business. This particularly applies to B2B franchise systems.
For example, a franchise operation often requires strong selling and interpersonal skills; if the franchisee is shy, or not inclined to get out and develop customer relationships, it can lead to poor business performances and most probably franchise failure.
When you run your business, you suddenly oversee operations, staff, some level of marketing, and financial management to name but a few. A franchise owner must be able to manage all the components of the business and self-analyse their performance to adjust trajectory when needed.
2. You underestimate the work involved
While some franchise models offer good work/life balance (such as free weekends with a B2B model for example!). As a Franchisee you must prepare yourself to work hard and be highly motivated.
Some people mistakenly think that because they are entering into a franchise system; all they will need to do is invest and have a manager run it for them. Big mistake.
For a franchisee to fully reap the rewards, you need to commit yourself to daily operations.
3. Be careful with your rent
Rent is the most significant fixed cost for any small business. High rent can put a lot of pressure on your business. Of course, you can always consider a relocation; but relocations can be difficult to organise and inevitably cost money, not to mention disrupting business production.
We recommend a rent at or below 8 percent of your sales. The exception to this is if a franchisee has a very profitable, high-volume store in a great location.
4. Be pragmatic, don’t let your emotions rule you
Removing any emotion from the investment is important. Weigh up the pros and cons fully before making a decision. This means taking into account a whole range of elements such as thinking about the type of industry, the level of involvement and the support from the franchisor.
Before you decide to invest your hard earned cash, ask yourself a couple of question such as:
Is this a worthwhile investment and do you understand what you should do to achieve the desired return on investment?
Often franchise failure occurs because of lack of due diligence.
If you are considering buying, download our FREE Ultimate Due Diligence Checklist today. This document guides you through 43 points and covers all the essential areas you should be assessing before investing in any business Download here
5. Insufficient working capital can also lead to franchise failure
Don’t underestimate the capital you require to reach positive cash flow; this can be another contributory factor when it comes to franchise failure.
In a resale, for example, you should be able to ask the vendor, the broker or the franchisor what the approximate number of sales you’ll need for your working capital. The bigger the business, the more working capital you will need.
You will need additional working capital to cover personal and living expenses if the business is not making enough profits to cover estimated franchise drawings.
Every so often, a new owner will assume that he or she can do better than their predecessor. Confidence is good; overconfidence can lead to devastating outcomes and franchise failure.
A slow startup will also require more working capital. Hence the importance of planning and organising conservative projections to identify the level of cash flow the business needs.
After all, you don’t want to find yourself in a position where you need to find more money after you take over the business.
Here at Kwik Kopy, we’re committed to new franchise prospects conducting a thorough due diligence. Why not tell us more about your current situation and where you want to be. Our experts can help you identify if Kwik Kopy is right for you.
Reach out to Peter Fiasco on 02 9967 5500 or by email on franchise@kwikkopy.com.au
We’re here to help you find the right business to suit your budget and aspirations.
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