Why Some Existing Franchise Businesses Fail

Opening a franchise business is widely regarded as a very effective way for the average entrepreneur to minimize their risk when starting a new business. In general terms I would agree that this claim is accurate. However, don’t kid yourself that just because you opted to start a franchise business that you are more or less guaranteed to achieve success. In my experience nothing could be further from the truth. Many new franchise businesses fail, and fail all the time. Below in my opinion and experience is a few of the main reasons why some franchise businesses don’t make it.

Poor Location:

For retail franchise businesses it’s all about location, location, location. In my opinion a marginal location with poor visibility and low organic traffic can often be an impossible obstacle to overcome when launching a new retail franchise business. Before signing any retail lease for a franchise location make sure you thoroughly investigate the organic traffic potential of the site including soliciting the opinions of other business owners in the immediate area.

Incompetent Ownership & Unrealistic Expectations:

Many new franchise businesses never stand a chance of surviving because the owner is just not capable of following the basic franchise system, or is unwilling to put in the hard work and make the necessary sacrifices required to succeed. Unfortunately as a small Business Broker I see this scenario arise all the time in the form of a phone call from a new franchise owner that wants to sell 6 months after opening. Many of these owners reveal that operating a franchise is not what they expected or it’s just too much hard work. In lot of these cases I believe the Franchiser probably never should have awarded a franchise license to some of these candidates in the first place. But at the end of the day it’s the responsibility of the franchisee to make sure they fully understand the commitment and hard work that’s required to succeed in today’s marketplace.

Brutal Competition:

Many new franchise businesses face overwhelming competitive forces from similar franchise concepts and independent businesses already entrenched in their target market. In some cases this includes competition from other fellow franchisees who have been allowed by the franchiser to open other locations in a relatively small market area. In short, it’s my opinion that many major metro markets are completely oversaturated with certain types of franchising concepts making it sometimes extremely difficult for new franchise owners to make a living and ultimately succeed.

Franchise Fad:

Inevitably there are going to certain hot franchising concepts that emerge in the market place that are ultimately going to fizzle out as a fad. Remember the meal preparation franchise craze? Maybe because I’m a guy, but I never thought this was a very compelling or strong franchising concept to begin with. But regardless of what I thought, it appears that the vast majority of meal preparation franchises that opened between 2002 and 2008 (under several different franchiser flags) have closed their doors already with many franchisees loosing hundreds of thousands of dollars in the process. The moral of the story is just because a new franchise concept is popular or hot doesn’t mean it’s a proven business model.
Under Capitalization:

One of the most common reasons I have found that a lot of franchise businesses ultimately fail is they are simply don’t have enough working capital to survive the initial start-up phase. It’s a fairly well known franchising fact that the majority of new franchise businesses are not able to show a profit until there second year in business. This is why it’s crucial to have adequate working capital in reserve to meet your operating expenses until you can reach profitability.
Summary:

Please keep in mind that all prospective business buyers should thoroughly investigate any franchise or business, obtain all appropriate disclosure documents available, and seek expert consultation prior to making any investment decisions.