6 Reasons Franchise Businesses Fail and How to Avoid Them

As an investment and a point of personal pride, you want your franchise business to succeed. So does your franchisor, your customers, and your employees. So, as you begin your franchise journey, let’s look at some reasons franchises fail and what you can do to avoid them.

1) Lack of Capital

We’re putting this right at the top. You can probably guess why. It’s no secret that starting a business costs money, but some potential franchisees underestimate exactly how much money their chosen franchise will require.

The information provided by the franchisor, including the Franchise Disclosure Document (FDD), will provide a general idea of the financial requirements including net worth and liquid capital. But paying attention to ongoing costs like rent, wages, franchise royalties, taxes, and your own living expenses is essential for staying solvent.

How to avoid this: A thorough examination of your available capital should be a part of your initial research. Start your franchise with plenty of capital in your pocket—more than you think you need—and consider reasonable financing options. Then keep a realistic budget through the life of your franchise.

2) Lack of a Strong Business Plan

Going into business without a business plan, or with only a partially or hastily completed one, is like hitting the road without knowing where you’re going. You end up driving in circles, getting lost, and wasting a lot of time. Buying a franchise, like starting any business, requires a forward-thinking business plan so that everyone involved can see clear steps from point A to point B—from starting out to becoming sustainable.

How to avoid this: Put in the effort to create a quality business plan, potentially with the help of a business consultant or business coach, read everything you can get your hands on from the franchisor, and think hard about your own goals and abilities.

3) Thinking There’s Nothing Left to Learn

Franchises are great for people with limited business experience because they provide proven systems and ongoing support. But for people with extensive experience, thinking you know all the ins and outs of the industry can get you into trouble.

How to avoid this: Remember that a franchise has a specific way of doing things that may differ from what you’re used to, even if you’ve been in the industry for years. Do your research and due diligence before and after you open your franchise and listen to the advice of fellow franchisees—especially when they’ve made mistakes from which you can learn.

4) Failure to Follow the System

One of the easiest ways to fail is by failing to follow the proven system created by the franchisor. The system exists because the company has learned the best approaches to their industry over years of hard work and experimentation. They’ve worked out the bugs so that you can reap the benefits.

How to avoid this: Take the training, support, and advice of the franchisor seriously and incorporate it all into your operation. The system may not be foolproof but being a franchisee means being a part of a larger brand with documented records of success.

5) Lack of Franchisor Support

Sometimes franchises fail not because the franchisee made mistakes but because they weren’t properly supported throughout the process. Whether the initial training was insufficient or ongoing backing was too limited, running a franchise without enough support from the franchisor is a recipe for disaster.

How to avoid this: Carefully read everything provided to you by the franchisor so you know what their obligations will be. And speak candidly with current and former franchisees about their experiences. That information will help you choose the franchisor that provides the right amount of support for you.

6) Choosing the Wrong Franchise for You

Some franchisees have trouble from the start because they chose the wrong franchise for them. Perhaps the decision was made too quickly or was based on emotional factors that don’t hold up over time. Whatever the reason, getting stuck in a franchise that’s not a good fit leaves everyone unfulfilled.

How to avoid this: Get to know yourself and your goals for your franchise. Then think about how the franchises you’re considering will feel tomorrow and ten years from now.

Franchising always includes risk, so keep all of these potential missteps in mind as you search for your new franchise.