Five Reasons Why Franchises Fail – Franchise Failure Rates

Getting the Low-Down on Franchises
For people who want to open a business they can call their own, the option of buying a franchise is clearly one of the best possible routes to take.  Franchises offer instant brand recognition, a proven operating system developed over many years, and plenty of corporate support.  But not everything is flowers and puppy dogs in the franchise world.  There is always the prospect of a franchise failure, and the smart entrepreneur should always look at the down side when contemplating any sort business investment.  The franchise failure rate will vary by industry and even depend upon the brand in question.  Specific details are noted below.

Here are the top five reasons why franchises fail:

1. Ineffective Parent Company
A successful franchise concept offers products or services the public needs, at prices people are willing to pay, and in a manner that makes them feel good about doing business with that establishment.  Conversely, franchise failures occur because they sell something consumers aren’t clamoring to buy, or else have indifferent feelings about.  If the parent company’s business plan is overly complex, or should the franchisor not provide an adequate level of support, your business will suffer accordingly.

2. Poor Location
Even the best franchise concept in the world will fail to draw customers if your store can’t be easily found.  Higher-profile spots always cost more in rent than those in less advantageous places.  After all, that’s the nature of the real estate business, with its cry of “location–location–location.”  Most parent companies spend lots of time and effort to ensure that their franchisees are situated in a place that optimizes the opportunity to generate maximum sales.  But some do a better job of this than others, and oftentimes the franchisee is forced into a lesser location because of cost.

3. Too Much Competition
How many fast-food hamburger joints can your town support?  Does the metropolitan area really need another daycare center?  Are there enough six-figure-income families around to warrant the opening of a second feng shui consultancy?  Many franchise deals come with rights of exclusivity, which means that no one else in your district is able to purchase a franchise from the same corporation.  But that hardly protects you from competition in general.  Also, a too-small territory may mean that the same operation across town is bleeding off customers who would visit your establishment if the other place did not exist.

4. Lack of Adequate Marketing
Many franchise deals include access to national or regional ad campaigns.  In some cases, franchisees are allowed to run their own local ads; for others, they must make do with whatever the brains in the home office dream up.  Just because you have a well-recognized brand name, that doesn’t mean you’ll automatically capture a big chunk of the business.  Franchise failures litter the landscape thanks to inadequate promotion—which can be caused by a lack of advertising or a marketing plan that people choose to ignore.

5. Unrealistic Goals
Everyone wants to be successful, but buying a franchise without understanding all the risks can set you up to fail.  Some of the fault may lie with the franchisor, as sales reps inevitably paint as rosy a picture as possible to entice you to buy.  Don’t expect to work a 40-hour week or see very much of your family—unless you’re working alongside them, of course—and always assume that you’ll need more of a cash cushion to weather the tough times than anyone at the home office may admit.

Those Failure Rates
A 2007 survey taken by the U.S. Small Business Administration (SBA), which guarantees loans for business startups, offers some examples of franchise failure rates as indicated by individual franchise brands (which have been rendered here generically):

  • Transmission service business: 10 percent
  • Hardware store chain: 6 percent
  • Ice cream shop: 0 percent
  • Second ice cream shop: 7 percent
  • Bagel store: 26 percent
  • Real estate company: 4 percent
  • Fried chicken restaurant: 10 percent
  • Mobile computer repair: 8 percent
  • Hair styling salon: 5 percent
  • Second hair styling salon: 7 percent
  • Smoothie store: 23 percent
  • Home plumbing service: 4 percent
  • Pet supplies chain: 15 percent
  • Pizza restaurant: 15 percent
  • Second pizza restaurant: 0 percent
  • Third pizza restaurant: 19 percent
  • Tanning salon: 14 percent

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2 Responses to “Five Reasons Why Franchises Fail – Franchise Failure Rates”

  1. Keri Allred Says:

    I think it all comes back to your research. Proper research and thought can eliminate so many of our failures. Rather than jumping into things, people need to wait and talk to the right sources.

  2. Ryan Says:

    How about “When Dealing with Sellers, Trust then Verify”

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