A study of startup franchises was done by Franchise Grade.com www.franchisegrade.com over a ten- year period from 2007 to 2017. The franchises were divided into eight groups comprised of 0 to 100 locations, beginning with the year first franchised. The data showed that it took significant time for many startups to achieve even modest growth.
Franchising Your Business? Don’t Let Dreams Of Success Influence The Process
By Ed Teixeira, Co-operative member with Franchise Growth Solutions,LLC.
The dream of building and developing a successful franchise company continues to motivate independent business owners, many of whom operate small businesses. They are encouraged by numerous success stories about how small business owners grew their franchise into regional or national brands by utilizing the franchise model as a pathway to increased growth and financial success. However, many of these new franchisors may find their results falling short of expectations. The metrics pertaining to franchise startup performance, despite the hype from certain sources, reveals how challenging it can be to build a successful new franchise. Research reveals that a disproportionate percentage of businesses that launch a new franchise brand fail to achieve favorable growth during the first four years. Many cease franchising after failing to add a single franchisee, ultimately returning to operating their original business. One reason for this outcome is that some startup franchisors share the same expectations as a new franchisee. Namely, both see future franchise success as a smooth road, neglecting any potential potholes.
A study of startup franchises was done by Franchise Grade.com over a ten- year period from 2007 to 2017. The franchises were divided into eight groups comprised of 0 to 100 locations, beginning with the year first franchised. The data showed that, it took significant time for many startups to achieve even modest growth.
30.6 % of franchises that started four years before had zero to one franchise locations.
After ten years from launch 52.4% of the group had 50 or less franchise locations.
I’ve met with startup franchisors who had such unbridled optimism, they couldn’t foresee the smallest possibility of failure.
A Process to help arrive at a successful outcome
Build a strong foundation of franchising knowledge:
Business owners considering franchising their business should acquire a knowledge base on franchising from various sources including trade associations, Federal and State agencies, successful franchise executives as well as franchise attorneys and consultants. Don’t rely on a workshop at a franchise trade show to provide all you need to know. In the age of the Internet there are countless sources of information regarding franchising. A strong understanding of the franchise business sector, pertaining to independent and franchise brand competitors, is critical.
Focus on understanding what’s needed to develop a successful franchise system. Above all, don’t be overwhelmed by franchise success stories. Put ego aside. Unless you’re a franchise expert, listen to those who have a strong understanding of franchising. Think walking before running.
Develop a potential franchise market development study to identify the markets and regions that offer the best opportunity for success. Many startup franchisors will sell franchises throughout the country without ever considering the importance of brand building and franchisee support. This is a flawed strategy.
Avoid devoting the bulk of your franchise investment capital to building the franchise. Legal, consulting and marketing fees can add up very quickly. Some business owners exhaust the bulk of the project capital on building the new franchise with little left for franchise staff, marketing and other activities without knowing how costly and difficult it can be to sell that first franchise and more.
Whenever possible, make sure you have advice from people who have operated and developed a franchise system.
Just like the advice provided to prospective franchisees “Don’t allow yourself to be sold.” Rather be cautious, guarded and seek confirmation of important facts and representations.
Although, some new franchises get off to a fast start this is the exception not the rule. Be sure to temper your expectations and spend your franchise capital wisely.
Avoid these pitfalls of franchise startup failure:
Despite the advice of some franchise consultants, not every business is suitable for franchising and can’t be built into a successful franchise model. This may be because at the beginning of the franchise evaluation process there was a lack of objectivity when evaluating the business for a franchise.
Failing to utilize and follow the analysis and opinion of financial and legal advisors and request them to provide you unfiltered feedback.
The business owner and staff lack the required business skills to operate a franchise system. This situation can manifest itself in several ways including the inability to lead or manage a multi-unit organization. There is a lack of existing or available management staff that can operate the new franchise plus the existing business. Too many franchises start up as a two-three person operation.
The business owner doesn’t fully understand the implications of franchising a business and what it takes to be successful. Developing and launching a successful franchise program, requires the right ingredients. Unfortunately, a good deal of emphasis is placed upon building the franchise and not the launch and development of the system.
There is insufficient capital necessary to build, develop and operate a new franchise. A major reason why many startup franchisors fail, is a lack of capital needed to launch the new franchise brand. Just the cost of building a new franchise program including consulting and legal fees, can range from $100,000 to $200,000 or more.Many startup franchisors exhaust their franchise investment capital on the building stage and when it comes to staffing, marketing and supporting new franchises the franchisor lacks the required funds to execute the proper launch.
Business owners considering franchising their business need to be cautious, become franchise savvy and understand what it takes to build a successful franchise program.
There is a relationship between overly optimistic franchise system growth on the part of many new franchisors who lack the necessary business skills, capital and an attractive franchise investment model that appeals to consumers and franchise investors alike.
About the Author:
Ed Teixeira is Chief Operating Officer of Franchise Grade www.franchisegrade.com and is the founder and President of FranchiseKnowHow, L.L.C. a franchise consulting firm. Ed has over 35 years’ experience as a Senior Executive for franchisors in the retail, healthcare, manufacturing and software industries and was also a franchisee. Ed has consulted clients to franchise their existing business and those seeking strategic solutions to operational, marketing and franchise relations issues. He has transacted international licensing in Europe, Asia and South America. Ed is the author of Franchising from the Inside Out and The Franchise Buyers Manual and has spoken at a number of venues including the International Franchise Expo and the Chinese Franchise Association in Shanghai, China. He has conducted seminars, written numerous articles on the subject of franchising and has been interviewed on TV and radio and has testified as an expert witness on franchising.
The opinions expressed are those of the writer.