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Analyze the 5 reasons why a startup franchise may fail and what to do with it

Griffiths University recently reported that the overall number of franchises fell between 2012 and 2014 largely because of small and unprofitable franchise closures. This wave of closures, in my experience, poses a real “uneasiness” to both aspiring franchisors and franchisees.

But why is this happening?

Is it because the franchisor’s business model is not appropriate for franchising? Or maybe the business owner does not have the necessary skills to operate a franchise system? More importantly, will this mean that the odds of being able to expand at this particular time are highly stacked against you?

It is worth noting that over the years, many successful franchise systems did start with only one outlet – Subway, Donut King, McDonalds among them. Most new franchise groups start with one or very few outlets. And there are other smaller franchise groups which operate with a small number of outlets and do not wish to grow. Franchises such as Bushman’s Bakery, which is a small, family-run regional franchise group with about 8 outlets, operating on the Mid-North Coast and hinterland now. All these systems have managed to prevail regardless of economic situation or the size of the group.

Knowing you have to start small, the key to having a successful business format franchise system is to start smart and avoid the franchise profit traps.

Here are 5 steps you can heed to not fall and get stuck:

Don’t think a franchise is just a Legal Agreement and an Operations Manual.

A common mistake made by most startup franchisors is not having a clear structure for the way their franchised business will operate. They get caught up in drafting the legal agreement that protects the intellectual property of their business and creating operation manuals that act primarily as a sales tool for prospective franchisees.

While the agreement and franchisee manual are crucial both for the protection of your business and keeping your franchise outlets uniform, you need first to get your franchise business structure right.

Every franchise is based on two kinds of businesses – one for your franchisee delivering your product to your customer and one for you, as a franchisor, providing support to your franchisees. The tasks carried out by these two sides of the franchise are completely different and both have their own franchise operations and procedures manuals and the arrangements between the two determine the details of the legal agreement. Writing the legal agreement before you sort out the arrangements between the two sides is fraught with danger because you don’t yet know what you need.

2. Take care with the product and the location (What product is the target market looking for – Demographics)

In every good business, the product or service is tailored for a particular target market, a group of people who love you and who spend with you. Your tribe. And it is your tribe who will make you profitable.

In a franchise group, knowing the demographic characteristics of your tribe and knowing exactly what they desire from you is even more important.

This is because you will want to hone your product and market it around the desires of your most profitable customers. Do they want upmarket wood-fired pizzas or is the speed of delivery and the price that the defining factor.

It is also because the demographic profile of your tribe feeds directly into the planning you need to do for your franchise territories. These characteristics will determine where your franchisees will be most profitable and how big each area needs to be to give each franchisee an equitable return.

Get these two interlinked things wrong and you will struggle with establishing profitable franchise outlets in the future. Get them right and you’re on the road to sizable growth.

3. Think carefully about ongoing fees to support your franchise outlets, especially for the long term

Many new franchisors overlook the need to charge sustainable ongoing fees to cover the support services they need to give their franchisees. It is not easy in the early days to work out exactly what you will need to do to keep your franchise outlets up and running and to keep your franchisees happy. Exactly what should you be doing to help them bring in customers, how much work will your support team need to do to keep them all up to speed, will you be making sure all your franchisees attend the annual conference and how much exactly will you need to run your franchisor side of the business – the list is long. And many of your responsibilities will be set in stone in the legal agreement you set up in the early part of your journey.

The thing is, in the early days, you will be receiving one-off payments for franchise territories which can cover much of this work. But, in the longer term, as all your potential territories are filled, this one-off initial income will reduce. Then it will be really important that the on-going frees cover your part of the deal.

Redspot Taxi Trucks very successfully developed in Perth in the 1980’s to around 20 franchisees. But once there were no more territories to sell, the franchisor business failed because their ongoing support fees had not been calculated correctly. They were not adequate to cover the ongoing support and training needed by a mature group franchisees.

To avoid a similar outcome, spend time carefully working out what support you will provide in the long term and the costs and make sure the way these are reflected in your legal agreement is flexible enough to grow with growing needs.

4. Think about support and marketing – especially in the long term

One of the most profound sayings from Greg Nathan, Principal of Franchise Relationships, is ‘Happy franchisees are profitable franchisees.’Franchise Relationships specializes in working with established franchise groups to improve the crucial franchisee – franchisor relationship.

Taken together with the notion that it is your franchisees who will bring in the money for both sides of the franchise in return for your services, you need to take care of your part of the agreement in detail or your franchises will be at risk of disintegrating.

Basically, as franchisor, you have two jobs.

You need to make sure the marketing for the whole group is strong. This involves making sure the brand looks, feels and acts the same throughout the group, and making sure the leads are coming in so your franchisees have customers to serve.

You also need to provide a strong support system for your franchisees. Something that makes sure they operate their outlets consistent with your brand and they get the attention and training they need.

5. Don’t hire the first person with the money to invest

The right person to take up the role as your franchisee is instrumental in propelling your business forward. You need to really understand the combination of skills, personality, experience and passion you want see your franchise business a successful one. The wrong characteristics can be devastating to the morale of the group, especially in a new franchise.

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