Potential franchisors need to know what steps to take – and not to take – before deciding to franchise their business.
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Around 80 per cent of companies that develop into franchises don’t continue in franchising after the first five years. Franchising is a desirable proposition to a business looking to grow rapidly, spread its risk and expand on a franchisee’s investment capital and enthusiasm for business success. However, with franchisor failure rates being so high in the first five years – and note I’m saying here that the franchisor is failing rather than the franchise model itself, as this is key – potential franchisors need to know what steps to take – and not to take – before deciding to franchise their business.
So, here are my top five reasons why a franchise may fail because of the franchisor.
1. Not talking to a range of consultants
Franchising is often the standout option for people looking to expand their business. It allows you to expand on someone else’s money and it automatically solves the issue of who will run your new locations. You won’t find a more motivated manager than a franchisee because they are financially invested in the business.
The only problem is most potential franchisors haven’t got a clue if their business is even suitable for franchising. So, once a business decides to explore the franchise model, they often seek out the help of consultants to advise them whether or not they should, or could, take the step into franchising. A good franchise consultant will be able to tell you if your business is franchise-able within 30 minutes. However, not all consultants are as ethical as those you’ll find approved by the British Franchise Association (bfa).
Some will take forward the process of franchising a business when it’s not a viable option. Unfortunately, this means they will skirt issues, avoid asking difficult questions, and ignore the unfortunate answers. Because many potential franchisors will trust what an ‘expert’ says to them, they often start their journey in franchising off on the wrong foot.
To avoid this, ensure that you speak to a range of bfa-approved consultants before committing yourself to franchising your business. Get a range of opinions and quotes; you’ll be surprised at how they may vary.
2. The hidden costs of recruiting franchisees
It’s easy for consultants to entice a business owner to franchise by showing a projected business model for the next five years that looks amazing. However, the marketing budget needed to generate interest, the types of experienced personnel required, or the cost of training recruits are skimmed over.
This leaves potential franchisors in the dark on how much everything will genuinely cost, how that affects cash flow and ultimately, often causes failure.
To go into more detail on this, before signing just one franchisee, you usually need around 150 leads or inquiries. If the minimum cost to generate a lead (or enquiry) is £20, it will cost £3,000 in marketing just to secure one franchisee – if you get everything else right! Combine this with other upfront costs such as the salary or cost of the person handling leads, the direct costs and materials required to set up the new franchisee, hardware and software costs, as well as your franchisee training costs, and the outgoings soon start to build up.
Without having the knowledge of what adequate initial capital and resources are required when starting a franchise, a franchisor is set to fail from the start”
Without having the knowledge of what adequate initial capital and resources are required when starting a franchise, a franchisor is set to fail from the start. It will take time before a franchisor becomes royalty self-sufficient and, in the first 12-to-24 months, franchisors should not be relying on that income for operating expenses and keeping the franchise business going.
Dugan Aylen is head of franchisee recruitment at The Franchising Centre.
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