Even the most solid of business concepts, the most thoughtful and most comprehensive in training, systems and support can result in a failed investment.
Here are five reasons a franchise fails:
1. Life cycle of the business model is nearing its end (e.g., used records, video rentals)
2. Wrong location/wrong demographics
3. Underestimating the various ways the business can be affected by competition
4. Overestimating the market for the service or product (especially true in this economy)
5. Bad operator (you need to have confidence in your abilities, but few are good at everything they try)
No franchise is certain to succeed – even the largest franchise systems in the country have far from a perfect track record– there are some that seem virtually certain to fail.
Here are some red flags:
1. The business being franchised has not been operated long enough to do much more than make a profit but it is promoted as a proven concept.
2. The founder of the business has either: started the business for the sole purpose of franchising it and has no real passion for the business or decided to franchise without understanding how to be a franchisor and has focused on selling franchises and–more or less–getting them started rather than a small core of truly successful franchises
3. Franchisor has no money, no ongoing business advisors
4. Franchisor uses a franchise “packager” to put together its franchise documents who profits primarily from the start up package and/or sale of franchises, but not from on-going counseling of being franchisor, or….
5. Franchisor copies the franchise documents of a similar business concept to cut costs which means they are basically clueless about the whole business
6. When franchise fees/royalties/mandatory purchases are added to operating costs, the probability of the business being much better than a low paying job
7. The franchisor cuts corners on legal compliance because it’s too expensive
The best franchise is the franchise that will be profitable for you, achieves breakeven at a point in line with your expectations and is supported by a franchisor that meets or exceeds the expectations they create.
Oh, and wouldn’t it be great, if you had fun too?