4 Reasons why franchisees fail

Reasons why franchisees fail

Franchising is a continuing relationship in which an established company licenses another party to sell its products, goods or services under its brand name and offers assistance in organizing, training, merchandising, marketing and managing in return for monetary consideration.

It is fact that franchising is growing faster than most other industries in India. This business is becoming popular among international and domestic players across many industries.

However, needless to say, just because you have a franchise does not imply that you will be successful. The business owner has to bring something to the table.

It is to be understood by every investor and entrepreneur that franchising is a low-risk venture and not a risk-free one. Here, in this article, we present enlists reasons behind the failure of franchisees.

1. Wrong Fit:

Loving the products or services of a particular brand or loving a brand from customer’s point of view doesn’t make you a right fit for running the business.

Simply loving the products and services of a brand from consumer’s point of view without acknowledging the challenges of running a business doesn’t bear desired results.

No matter how passionate you are, you’re aren’t a right for the business if you aren’t dynamic enough to evolve with the business over time or incapable of managing or retaining staff.

2. Inadequate Business Planning:

When franchisees fail to prepare a business plan before commencing their franchise, they are most likely to fail. A business plan plays the role of a road map showing the way to achieve profits by certain milestones.

To ensure that the franchisee operates their business according to their plan, the franchisor needs to involved in the planning process to analyses and constantly monitor business plans submitted by franchisees.

A business plan should always be unique to the franchisee and their projections for better business performance.

3. Under capitalization:

Being under-capitalized is a leading cause of a franchise failure. The initial fee is always clearly mentioned but newcomers many a times underestimate operating costs.

When you as a partner start operating business without sufficient working capital, you will be unable to pay your bills when they are due especially if the amount of cash going out of the business is greater than the amount coming into the business.

Inadequate working capital can be the result of a slow start-up or the franchise operation requiring more working capital than stated in the franchise agreement.

4. Not following the System:

A franchisee business is not designed for an independent-minded entrepreneur looking to beat to the sound of his own drum. It’s important to understand the nature of business before investing in it. 

Policies and operations manual are part of it and they exist for a reason. Despite knowing the nature of franchise business, some entrepreneurs think and strive doing better by flouting the system.

The system has been designed by the franchisor out of quality experience and that’s why when followed it yields better results. 

When the system is flouted, it can decline sales and profits of the business and even termination by the franchisor.

Now that you know the major reasons behind the failure of a franchisee, you stand a chance to succeed at top gear.

Dhinal Baxi

Dhinal Baxi is a founder of franchise Insider. As a founder, he has served hundreds of clients. His experience from the financial sector has helped them to achieve great success.