While buying a franchise is generally considered to be less risky than starting an independent business in the same industry with the same start-up costs, many franchisees still fail. There are several reasons why, and these reasons are not necessarily consistent across industries or franchise systems, or even within individual franchisors’ ranks. The risk of failure is one of the primary reasons why all prospective franchisees need to work with an experienced franchise attorney before buying, and it is why active franchisees should engage legal counsel promptly if they run into issues or have a dispute with their franchisor.
While the question, “Why do franchisees fail?” does not have one single straightforward answer, there are a number of possible reasons for franchisee failure. Some of these reasons include:
1. The Franchise System Isn’t Sound
Like anything else, some franchise systems are simply better than others. If a franchise system isn’t sound – if the brand doesn’t resonate with customers, if the products or services are subpar, or if the marketing plan just doesn’t work – then franchisees are going to struggle. If Item 20 of the Franchise Disclosure Document (FDD) shows a high volume of franchisee turnover (including a large number of franchisees leaving the system “for other reasons”), this may be a sign that there issues with the system as a whole.
2. The Franchisor Doesn’t Provide Adequate Training or Support
Lack of training can be an issue in systems where (i) there are a significant number of complex or proprietary aspects to franchisees’ operations, and/or (ii) the franchisor vigorously enforces franchisees’ compliance obligations. Franchisees can also struggle to establish and maintain profitability if they do not receive adequate ongoing support from their franchisors.
3. The Franchisor Doesn’t Have Adequate Financial Resources
Overseeing and managing a large franchise system requires a significant amount of liquid capital. If a franchisor does not have adequate reserves, or if a large number of franchisees are struggling to make their monthly royalty payments, then this could lead to systemic failure and widespread franchise closures.
4. The Franchisee Didn’t Thoroughly Examine the Risks Before Buying
Of course, not all franchise failures are the franchisor’s fault. Franchisees are independent business owners who are largely responsible for their own success, and this starts with making an informed buying decision. Failure to adequately consider the legal, financial and business risks associated with buying a franchise is one of the primary factors involved in short-lived franchise ownership.
5. The Market Turned and the Franchisor Didn’t (or Couldn’t) Adapt
Finally, market factors can play a role as well. During the coronavirus pandemic, for example, franchisees in a broad range of industries are struggling, and many have been forced to shut down. While there are steps that franchisors can – and generally should – take to help their franchisees during market downturns, efforts to help franchisees often prove to be too little too late.
Considering a Franchise Opportunity? Contact National Franchise Attorney Jeffrey M. Goldstein
If you are considering a franchise, national franchise attorney Jeffrey M. Goldstein can help you make an informed buying decision. To inquire about one of our fixed-fee franchise review programs, please call 202-293-3947 or contact us online today.