While franchising’s prevalence in the U.S. economy indicates that franchisees can succeed, hundreds of franchisees fail each year. The most frequent causes: lack of funds, poor people skills, reluctance to follow the formula, a mismatch between franchisee and the business, and poor management. Often, it’s the small stuff that separates winners from losers.
A critical initial decision is picking a product you care about. Consider hiring a consultant to analyze whether you are a good fit with the business opportunity you are thinking about buying into. You also have to couple passion with discipline, avoiding too-fast growth at the expense of high-quality expansion.
Among the most common mistakes new franchisees make is signing on before adequately researching the business. Study what it will take to run the business successfully. And be realistic. Owning a franchise is rarely a get-rich-quick scheme.
Contact current and former franchisees to get their feedback, using names from the franchise circular from the franchisers. Never make a commitment based solely on information provided on the Internet or over the phone.
Sometimes, franchisers are to blame. Franchisers may be inexperienced themselves, a situation often found in very small systems. Or they may expand too aggressively, rendering them unable to service franchisees. Brokers or consultants selling concepts may be more interested in a sales commission than in making a good match between business and franchisee.
Another pivotal decision early-on is location. Think twice before locating a franchise using only your intuition. A location on the outskirts of town might be more affordable but may be too remote for customers to reach conveniently. Other factors may be at play. For example, one franchisee thought his spot on a college campus was perfect for his fast-food franchise. Students were a built-in source of employees and customers. And they were — when they were around. But they disappeared for football games and vacations. At the end of each semester, they had little spending money left for take-out or delivery. The location had no parking and so had no other customers. It eventually moved to a freestanding building with a big parking lot. It still delivers to campus, but now also serves families, whose average order is much higher than a typical student’s tab.
To find potentially successful locations, national chains use what’s called geographic-information-systems software that layers census and consumer-trend data upon every street and byway in the country. These tools can cost thousands of dollars. For a few hundred dollars, you can buy demographics reports for any ZIP Code in the country that will analyze population characteristics, income levels, lifestyle trends and even traffic patterns within about a mile of potential sites. You might want to pinpoint, for example, a high-traffic area with at least 40,000 cars a day, 50,000 people living within a two-mile radius, and retail locations nearby. Also consider whether adequate parking is available.
Another key to a franchise’s success is good customer service. That may include making additional investments to improve customer experiences, working overtime to satisfy customer time demands, and putting out extra effort to ensure products and services are done right.
While franchise systems offer pre-set business formats, flexibility and versatility help a lot. That’s especially true when it comes to marketing and promotion. To bring customers in the door, successful franchisees report using tactics such as discount coupons, free samples, direct-mail ads and fax blasts. No marketing job is too small or difficult for a franchisee determined to succeed. Many have success with community-based marketing initiatives, such as those involving schools.
For every franchisee chasing success, there are many competitors engaged in the same pursuit. Studying the competition by visiting their locations and looking for help-wanted signs signaling expansion plans, for instance, helps long-lived franchisees know when to initiate marketing plans to counter rivals’ efforts.
Franchisees can’t succeed without good employees. Winning franchisees treat employees well, so they will treat customers well. Some franchise businesses, such as fast food, have high employee-turnover rates. Providing corporate-style benefits such as medical, dental and retirement benefits can go along way to helping workers feel as though a franchise job is a career. Making sure employees are properly trained and executing according to the rules is vital.
That goes double for your managers. Franchisers say the No. 1 reason for a franchisee’s failure is that they don’t hire the right managers. Franchisees who lack management skills themselves might want to choose a business that could be run by just one or two people. Or, consider hiring someone skilled at motivating others.
Don’t forget: You have to follow the rules, too. Franchises aren’t designed for the independent-minded. They depend on a by-the-book execution of a business plan, adherence to time-tested systems, and a willingness to follow directions.
Insufficient funding is a prescription for failure in any business. With a franchise, the initial fee is clearly stated, but newcomers often underestimate operating costs. A slow beginning or unanticipated event can quickly drain and doom an undercapitalized franchise.
Unrealistic optimism also can be a recipe for financial distress. Borrowing to expand just before a downturn, for example, can lead to rapid bankruptcy. Franchisees need a financial cushion to weather unexpected situations. Experts advise new franchisees to have a nest egg for emergencies and assume they will lose money the first two years.
Franchisees who leave the management of their units to managers and who may or may not be on the premises every day are also less likely to succeed than owners who take a hands-on approach. They may not know if the help is showing up, what customers are complaining about, or whether employees are dipping into the till. Theft can be contagious and contaminate an entire organization if not stopped immediately.