Five reasons franchisees fail, and how to avoid the pitfalls; Being motivated by the misconception that running a franchise will be easy and highly profitable

Five reasons franchisees fail, and how to avoid the pitfalls

Published 03 June 2014 14:11, Updated 03 June 2014 14:55

Steven Clare

Franchising is big business. In Australia, the franchise sector contributes $153 billion to the national economy. At present, there are an estimated 1200 individual franchise systems operating in Australia, and we have the highest number of franchises per head of population anywhere in the world.

It’s obvious Australians are keen to invest in franchises, but there are pitfalls for new franchisees.

1. Being motivated by the misconception that running a franchise will be easy and highly profitable.

If you think running a franchise is easy – think again. New investors might be motivated by thinking a well-established brand will be highly profitable, however, there is always competition. Even highly successful brands like McDonalds need to be ever mindful of competition. Creating and implementing marketing strategies sanctioned by head office is crucial. This trap is best avoided by entering into a franchise arrangement motivated by a hard work ethic and the will to succeed.

2. Investing in a franchise with poorly developed business systems.

Surprisingly, some franchisors don’t have adequate business systems in place. Inadequate analysis of the business system to ensure suitable profitability can be a concern. This is compounded when franchisors fail to listen or lack an embracing culture. This trap can be avoided by ensuring the franchisor has a well-developed culture, focus and business model.

3. Lack of research, analysis and due diligence.

This is a big one. Franchisees can spend a million dollars or more on a single site, without carrying out enough research for such a large investment. Franchisees are prepared to cut corners by not outlaying the necessary funds to gain suitable advice. The best way to avoid this trap is always invest in the best possible advice before making such an important business decision.

4. Not enough support during the franchise term.

Ongoing support is critical. Many franchisors fall down in this area simply because they lack the necessary resources to give franchisees the support they need. This can be compounded by poorly managed expectations around the business relationship. Ascertaining the amount of business support you can expect at the very beginning of the contract is vital to avoiding this pitfall.

MyAFSA was formed to help bridge the business support gap, offering franchisors additional support to ensure their franchisees succeed.

5. Lack of responsibility on behalf of the franchisees.

This relates to the third point. Everyone involved needs to be accountable for their own actions. It’s a contractual business arrangement, and both parties need to be accountable. Both franchisors and franchisees need to enter into this business transaction with a very clear understanding of what is involved.

Often legislation isn’t the best way to resolve disputes. New legislation affecting the existing Franchising Code of Conduct, will be introduced from January 1, 2015. This will include the introduction of penalties largely targeting the franchisor, which may result in greater division between franchisors and franchisees in given circumstances.

This pitfall can be avoided with good corporate governance, which works well for franchisors and franchisees alike. Both parties need to be clear about their responsibilities and do their best to deliver them.

Steven Clare is the founding member of MyAFSA and lawyer/director of THINK Franchise & Commercial Lawyers.