Starting a franchise can be a great way to get into business. However, it can also be risky, with a failure rate higher than the average for all businesses — a staggering 50 percent, according to some estimates.
The failure rate for franchises is so high because of the high initial investment required and the fact that you’re essentially buying into a business model that may not be sustainable. In addition, you’re often working with a company located far away from you, which can make it challenging to get the support you need to succeed.
Read on to learn more about the failure rate for franchises and what you can do to increase your chances of success.
What Is The Failure Rate For A Franchise?
In franchising, there is a lot of exaggeration which comes from those who ought to know better. If you’ve been researching franchises for any length of time, you’ve probably already seen some eye-popping numbers.
According to experts, despite the myth that franchising is the safest method to choose when beginning a new venture, the research doesn’t support this claim.
In fact, the stats show that approximately 50% of new franchises will not make it to their fifth anniversary.
This number is eerily close to the failure rate for all small businesses, which is also estimated to be around 50%.
The main difference seems to be that people think of franchising as a low-risk investment when in reality, it is anything but.
The truth is, when you invest in a franchise, you are essentially buying into someone else’s business model.
This means that you are trusting that they have done their homework and figured out a way to make their business successful that can be replicated over and over again.
However, as we all know, no business model is perfect, and variables will always be out of our control.
This is why the failure rate for franchises is so high because even if the franchise you invest in has been successful in the past, there’s no guarantee that it will continue to be successful in the future.
The Annual Rate of Franchise Failure
While it’s difficult to find an exact number, most estimates put the failure rate for franchises somewhere between 5 and 50 percent.
As per Mark Scott, who managed the annual surveys conducted by NatWest and BFA, the rate of failure for franchisors has stayed between 8-12% for over 22 years. He shares that some of the main reasons these businesses have failed are ill health, retirement, financial failure, and selling.
Interestingly, the research also shows that while seasoned franchisors saw profits ranging from 90-95% consistently over the years, new franchisors reported a loss during the early years of operation.
On the other hand, a 1995 study by Dr. Timothy Bates from Wayne State University found that the failure rate for franchises was much higher, exceeding 30%. Dr. Bates concluded that after 4 years in business, only 62% of franchise businesses were still operating.
This data should be taken with a grain of salt since it’s now over 20 years old. However, considering the fact that today, around 50% of franchises do not make it past their fifth anniversary, it can be concluded that the failure rate of franchises over the years hasn’t fluctuated that much.
Also Read: Why Do Most SEOs Fail To Produce Results?
What Are The Reasons Franchises Rate Fail?
As we mentioned before, the number one reason franchises fail is the high initial investment. However, that’s not the sole reason.
Here are some of the other top reasons behind franchise failures:
Whether you are franchising your own business or investing in a franchise system, how the idea is perceived by the community is crucial.
For example, while hamburgers appear to be something that appeals to everyone, not all fast-food restaurants have widespread appeal.
You will also struggle if your business plan is complex. You want to make a good example of your business so that potential franchisees can understand and replicate it.
If the business model or prototype is difficult to replicate, the likelihood of success is less likely, even if the company is operated by a great franchisor.
Ultimately, the franchisor needs to have a well-oiled machine before it can offer franchises to other people.
Non – Supportive Franchisors
The success of franchisees is greatly influenced by the franchisor. The possibility of franchisee success increases when the franchisor provides adequate training, continuous support, and helpful advice.
Franchisors should offer templates for HR policy manuals, marketing plans, and operational guidelines. These help franchisees implement proven systems in their businesses.
Programs for training employees are also essential to the success of any franchise. Franchise owners must offer staff training programs in both technology and customer service.
Franchisers should be involved in these programs to ensure that their methods are being properly communicated and executed.
Poor Advertising And Marketing
A great number of well-known and highly regarded franchisors have marketing and promotional funds to which franchisees must contribute.
Franchise giants like McDonald’s and Subway undertake national advertising campaigns that support all their franchisees, unlike some other brands that might have a more ‘hands-off’ approach.
This type of national advertising is vital for building brand awareness and creating name recognition.
When people see a McDonald’s commercial, they don’t just think of one store in their town – they think of the entire company.
This is the power of national advertising, and it’s something that all franchisors should strive for.
Unfortunately, the poor economy has forced many franchisors to cut back on advertising and marketing, which has had a negative effect on franchisees.
With less support from the franchisor, it’s up to the franchisee to find creative ways to market their business.
The cash flow commitments need to be laid out for potential franchisees to understand them.
One of the most common reasons for the collapse of a franchise business is poor management of cash flow, which can lead to insolvency.
In order to launch a franchise business, a franchisee might be required to forego financial support for protracted periods of time.
When starting a business, it is essential for franchisees not to incur an excessive amount of debt and always to have a financial buffer to fall back on should trading conditions become tough.
The franchisor must take into account the potential franchisee’s extra income streams before awarding the franchise.
For instance, a franchisee with a high-earning spouse could provide a safety net for the business while it is still in its early stages of development.
Lack Of Experience
Franchisees need to have some business knowledge and management experience before they can be successful.
While the franchisor will provide support and guidance, the franchisee is ultimately responsible for day-to-day operations.
This includes tasks such as hiring and firing staff, keeping on top of finances, and ensuring that customers are satisfied.
Franchisors should only award franchises to people who have the requisite skills and experience. Otherwise, the franchisee is likely to fail, which reflects badly on the franchisor.
The location of a franchise is just as important as the franchisor and the franchisee. A franchise business will not be successful if it is situated in a less-than-ideal location.
The perfect location for a franchise depends on the type of business. For example, a fast food restaurant needs to be situated in a high footfall area, such as near a shopping center or close to a busy road, so that people can see it.
Conversely, a luxury goods franchise might do better in a wealthier area where people are more likely to have the disposable income to buy its products.
Franchisors should carefully consider the location of each franchise before awarding it to a franchisee. The wrong location could result in the failure of the business.
Poorly Trained Staff
Franchisees are responsible for hiring and training staff. However, the franchisor must provide guidance on how to do this effectively.
Poorly trained staff can have a detrimental effect on a franchise business. For example, if customer-facing staff are not properly trained, they might give customers the wrong impression of the company. This could lead to a loss of business.
Franchisors should provide comprehensive training materials and support for franchisees so that they can train their staff effectively.
The failure rate for a franchise is a jaw-dropping 50% after just five years in business.
There are many reasons why franchise businesses fail, but some of the most common include poor management, lack of experience, and poorly trained staff.
The key to success for a franchise business is choosing a reputable franchisor, carefully considering the location, and ensuring that the staff is properly trained.
By taking these precautions, you can give your franchise the best chance of success.
Amit Gupta is the founder of DrFranchises – a digital marketing agency that helps brands rank #1 on Google Maps through local SEO strategies. Amit has over 11 years of experience in digital marketing, SEO, email marketing, and social media marketing. He’s also the owner of multiple franchises and has helped countless brands achieve success online. When he’s not working, Amit can be found playing with his dog.