A solid business plan, enough capital invested upfront, and the ability to adapt to change as it occurs in the marketplace – these are crucial for success when business owners decide to franchise their business. Whether the goal is to grow nationally or just open a few more locations within the same city, franchisors also need to adjust their original business plan to factor in franchisees. The same strategies and tactics that made their business successful won’t necessarily apply to others.
Here are the top five ways franchisors fail to plan for contingencies. Hopefully, identifying these issues and preparing for them in advance will avoid you ever being slapped with the “failed franchisor” label:
#1: Failing to Properly Vet Your Franchisees
Whoever you bring in to manage (or buy) one of your franchises should be a good business fit and really understand the challenges of running your type of business. If they’re just “fans” and want to get involved because they love your products/services, they may not be focused enough on big picture things like evolving the business and dealing with managerial issues.
Focusing only on collecting royalty fees and rushing to ring up more sales, means that franchisors are often tempted to skip over this step. But a bad fit could result in a franchise’s eventual closure, managerial headaches, and loss of income. If you have too many closures, it will make selling more franchises that much harder because people won’t want to touch what is perceived as a business risk.
#2: Lack of Adequate Training or Support
Even if you’ve partnered with the right person, simply handing them the keys to your franchise is not going to cut it. Regardless of their experience level running a business, they still need to learn your way of doing things. Lack of coordination across franchises is one of the top reasons they fail.
In addition to training in operations (the nuts and bolts of running the business), it’s equally important to give general business training. So, things like how to manage staff and inventory, manage payroll, run advertising, and understand long-term traffic and conversion trends all must be systematized. You must have a standardized operating procedure, otherwise resources can easily be spent or mismanaged.
#3: Insufficient Start-Up Funding and Working Capital
Running a franchise is a marathon, not a sprint. Naturally, there are startup costs involved in onboarding franchises, training, and acquiring real estate. Once franchises are up and running, there needs to be a solid plan to cover payroll and rent costs, inventory management, and other operating expenses. Taking shortcuts with this is where franchises start to fail.
Additionally, having working capital available means that bills can be paid on time regardless of how much cash flow is coming in. Balancing these requires understanding the difference between cash flow and profit. It’s also a good idea to have money set aside to reinvest in the business (perhaps buy more real estate, upgrade operating systems, hire more staff, etc), so that franchisors don’t go broke when doing so becomes inevitable.
#4: Failure to Follow the System
Assuming that a franchisor took the time to create Standard Operating Procedures (SOPs) around running the business, it’s the responsibility of the franchisee to actually follow the system. There will always be a franchisee who thinks he/she can do it better, but if their idea is at odds with the brand’s offer and values, it’s still likely to fail.
Innovation is of course still possible within a franchise network, but all parties must work together to lead from within the system. The accountability for success or failure lies with both the franchisor and franchisee. Just as a franchisee owes ongoing royalties to the franchisor, the franchisor owes ongoing support.
#5: Failure to Evolve
Complacency is one of the biggest stumbling blocks to success in the franchisor/franchisee relationship. Franchisees can often become unengaged in their business, counting on money from the franchisor to keep rolling in. But what often happens is that franchisees fail to pay attention to how the market is changing, so they miss the chance to evolve with the market. It’s the customer who determines the market, so the franchise must adapt to every-changing consumer/market trends in order to continue to evolve and thrive as a business.
Set up functional systems, choose your franchisees wisely, train and support them well, have enough working capital to cover contingencies for startup and beyond, and continue to evolve. You’ll be on the path to success in no time.
This is not an exhaustive list of why franchises fail, but does cover the most common ones. This is where problems can be caught early as far as the franchisor being disconnected from franchisees. With the right real time tracking, franchisors can support struggling locations and make marketing decisions and product decisions, based on this data.
It’s also crucial for franchisors to have real time awareness and connection to franchisees in terms of revenue so they can support struggling locations. Control’s payment dashboard makes that possible by supporting the ability to view and manage sales data from multiple franchise locations at once, in real time.
Control eliminates this process by aggregating all your data into one dashboard, enabling you to focus on what you do best: growing your business and achieving your goals!