Franchises fail at an alarming rate. Yet, your likelihood of start up success increases when you buy a franchise, but franchise failure rates are higher than you’d think.
Research on franchising in the US by Timothy Bates, a Wayne State University Economist, suggests that a franchise is not a safer haven over raw business start ups. After 4 years, only 62% of franchised businesses had survived, while 68% of independent small businesses were still open for business. And independent businesses are far more profitable. Profitability was actually negative, on average, for franchised firms over the four-year period. This study clearly debunks conventional wisdom that franchises are a better route for entrepreneurship.
Franchises offer the owners a proven method for starting a business. However, a franchise is not a guarantee of success. Many well-intentioned business owners purchase franchises that quickly fail. Knowing the reasons franchises fail can make a big difference in the ultimate success or failure of your franchise.
Below are some of the some reasons for franchise failures:
It seems that there are two kinds of franchisors. The first are companies that have proven their effectiveness in running a business model and then seek to expand their business by offering franchises to others. The second are companies and individuals who are merely looking to make a quick buck at someone else’s expense. Beware.
Bad Fit With the Franchisee:
Just because you like ice cream does not make you a successful manager of an ice cream parlor. Running a business requires many skills and passion alone won’t make you successful.
Lack of Capital:
Like most small businesses, a franchise will take a few years to build up a customer base and make money. A common error is to count on positive cash flow too soon. Many new franchisees need an income right away—this is not always possible.
Location is everything when it comes to a retail franchise success. A well known franchise will still fail if it is in a bad location. Resist the temptation to go cheap on location as a way to offset the cost of the franchise.
Too Much Competition:
Competition is a killer, even in franchising. If the market is saturated with businesses in your industry, then maybe you need to consider to locating to a different area or buying into a franchise in a different industry altogether.
Some franchisees mistakenly think that a well known franchise eliminates the need for them to promote their business locally. In fact, nothing could be farther from the truth.
Like any other small business, it requires hard work, dedication, and some luck. Many franchises fail simply because their owners had unrealistic expectations about franchise ownership
Franchises can be great but they are not for everyone—you might want to keep your day job.
John Bradley Jackson
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