Franchise System Failure

Franchise System Failure

How to Avoid Buying a Franchise that Might Go Under

Statistics show that your chances for success as an entrepreneur are greater if you start your new business as a franchisee rather than opening a business all on your own. A study conducted by the Small Business Administration from 1978 to 1998 determined that only 38% of non-franchised businesses were still open at their six-year point. A similar study in 1999 by the United States Chamber of Commerce found that 86% of franchises opened within the previous five years were still under the same ownership and 97% of them were still open for business.

So, if you're looking for ways to maximize your potential for success as a business owner, your odds are much better when you join a franchise system than when you try to establish a business on your own.

However, there are times when even franchise systems aren't successful and around for the long term. Of course there are no guarantees but you can boost your chances for finding a franchise with stability by doing some additional research.

Here are some suggestions for reducing risk in the choice of a franchised business:

Avoid being a lab rat

A franchise company usually begins when someone has a desire to bring a product or service to a wider audience. One or more units, often called company stores, are opened so the product or service can be tested, refined, retested and improved. Once the company stores have experienced some success, the company will begin early franchising efforts.

The most difficult time for a franchise company is when they open the first 25 or so franchised units. The company will have to learn how the concept works in a variety of locations and with a variety of franchisees. Marketing on a larger scale can be hit or miss and there are hundreds of details to be modified, changed, refined and locked down.

Once this initial group of franchisees experiences financial success, the franchisor will open up franchising to a larger group. If you are a risk taker, feel free to jump in at any of the earlier stages of a franchisor's development. If you'd rather avoid risk, confine your research on potential franchise opportunities to those companies that have survived the initial stages and have at least 25 or more successful franchise operations in place.

Yes, there are companies that are solid gold from inception. But as a general rule, the earlier you get involved in any business, the greater the risk. By joining an established company you will avoid many of the bumps along the road. A franchise that has reached a modest number of successful franchisees will have added sufficient infrastructure to support you and the marketing/branding efforts will help draw customers to your location.

By focusing your search on those companies who have reached this stage of development, you can increase your chances of success in finding one that will be around for the long term.

Validate with existing franchisees

Another way to increase your chances of franchisee success is to talk to the existing franchisees in a system. This cannot be overemphasized. The very best way to learn about a franchise system is to talk to a variety of franchisees and ask them very pointed questions, such as, "Have you reached your financial goals as a franchisee?" You want to find out actual earnings, not pie-in-the-sky expectations. New franchisees are notorious for having unrealistic expectations about the profitability their business will experience until they've actually been in business for awhile.

The next question to ask existing franchisees is about the overall attitude of the franchisor about the business itself. What you want to see here is an attitude from the franchisor that their success is based on the success of the franchisees. In general, the more the franchisor is willing to help the individual franchisees become successful, the greater the longevity of the company.

Confirm franchisor support

Once you've talked to existing franchisees and gotten good feedback about the company, you will want to take a close look at the infrastructure of the franchise company. Your success as a franchisee will depend on the dedication and expertise of the operational support people so find out how long they've been with the franchisor and what previous experience they've had. Your conversations with existing franchisees should help you learn whether these people are competent and accessible but you will also want to talk to these support people yourself to be assured of compatibility. The operations and support people are there for your benefit and you want to make sure you will get your money's worth out of the association.

While there are no guarantees that a franchised company will be around for the future, there are ways to position yourself for a greater chance of success. When doing your research, keep in mind that a company that has reached at least a modest number of units (a minimum of 25 is suggested) has a better chance of long-term survival than one that is new to franchising. If that company also has happy and successful franchisees and the right attitude toward mutual success, then you should feel comfortable the company has a very good chance of survival.

The bottom line is that just like any business, franchise companies can also fail. However, you can minimize your chances of joining a franchisor that won't go the distance doing a complete and thorough investigation of the company. This will take more work on your part but your reward is that you will be better protected from buying a franchised business that might go under.