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What lies behind the failure of many franchisors and what franchisors need to reach the success

When you have decided to run a business, you also have been willing to risk everything. No matter how good your business preparations, strategies, assets, and other relevant resources, no one can give you exact guarantees that you will reach the success in the future. Everything can happen to your business, both success and failure. The same thing applies in the franchise business. Your expertise, willingness, and passion in running the franchise do not determine your success in running a business. Our world gives birth to millions of new franchises each year, but there are only plenty of them which meet their primary expectation. Some franchises reached the success they expected, but the situation did not last for long. 

With many occurrences of failure in a franchise business, people from various segments started to ask one simple question. Are these failures natural incidents in business or something else? This simple question has been obsessing many people, especial franchisors and franchisees in running their business. For this reason, Scott Shane, who is a business school professor from MIT, performed a proper study and published the result in 1998 in Sloan management Review publication of the same institute. In his study, he used at least 150 companies from different 27 industries which choose to move franchise format between 1981 and 1983. He used twelve years as the independent variable for the study. When he had completed the study, he found out that at least 75% of all research subjects (franchisors) met their failure that means that only 25% of them which survive and reach the success. 


Well, it is both surprising and not surprising to see his development, but one question remains. Is this discovery still valid even until today?
Success stories become one common thing among many franchisors and franchisees, no matter which franchise type they run. Success stories change franchise business into both profitable and scalable business which at the perfect time will attract people to become its active members. Even though knowing the business type is important, people become interested in becoming a franchisor because they love the success stories existing members have. However, does not it look suspicious? Why can we still see failures in franchise while at the same time people reach their success?


Two coin sides not will correctly explain the relationship between success and failure in the franchise business, but also, it provides us enough information about common mistakes in a franchise business. These common mistakes lead  people to failure and how to transform this failure as a powerful asset that can lead us to success. 

 

Undercapitalization
You made a good business decision when you asked detailed questions before you start your own franchise, but not all questions are good. 

Some would-be franchisors ask, “How I can start my own franchise and how much I should pay for it?”
Now, play close attention the question. Can you see one thing that turns the question to ‘dull’ one? Well, if you cannot find it, let me show me. Instead of giving that question, you should ask, “What do I need to build a sustainable franchise business?” This question comes with better ‘quality’ than the first one because it covers multiple aspects you should have before you can run your own franchise as well as in managing your business. Let’s take a franchise that works in product packaging business. In order to start a fully-operating business, franchisor needs to spare at least $100,000 to build the system which includes Franchise Disclosure Document (FDD) drafting, training-program design, operation manual drafting, company website upgrade, business sale process design, tools, and other related resources. Franchisors who come with inadequate business experiences will come with one belief that once they have completed this stage, they can sit and watching their business generating much money for them from the profits and royalties. By underestimating the amount of capital value your business needs to run the whole operation, you have indirectly led your business into complete failure.


In order to avoid this nightmare, at least you should make $500,000 to cover initial activities of your franchise until you have more than fifty people joining as your member. Please remember that we set this number at very minimum rate. Some franchise practitioner may advise you to make $2 million for the same purpose. It is a common phenomenon at this stage when you may see a unique threshold where both your business recurring revenue and royalties cover all your business operational costs. However, please be careful when you look at the capital amount you need. It does not include investment the business owner/founder pulls out from the franchise. If you want to have a self-sustaining franchise, then you should put at least the same amount to your total cost.


In accordance with business capital subject, fact revealed that there are many franchisors especially the new ones who ‘unconsciously’ have trapped themselves in a never-ending circle. Yes, they get it right when there is enough capital they have in their pocket which they use to purchase franchise operation manual, FDD, advertisements, and other relevant expenses. However, this money is not enough for them in building a sustainable business through a healthy business growth curve. This event will become clearer than before once their franchise started the recruitment process. There are two possible things that may happen: either the have insufficient awareness of what the business needs or they (never) have a clear investment plan. It is a plan a franchisor needs to put money they have in the development stage which includes: staff operational cost, training system development, franchisees coaching, and other aspects. 

 

All come with wrong output: operations, support, and training
Any knowledge you have about franchise, no matter how advanced it is, will turn to complete meaninglessness. The only outputs you will get are underdeveloped business training and systems, poorly-prepared business support and services, and other bad outputs. Everything will only lead you to less active profit generation, low franchisee validation, and headaches for everyone inside the business. This situation will make everything else inside your business impossible including your franchisees in making high profit. You will be not able to attract other people who may have great franchising skills into your business. It is not impossible when you found yourself incapable in providing a solution to this problem; your franchisees will do everything to survive, even though it means that they should sell their franchise unit.

 

Surviving by selling 
When a franchisee or franchisor chooses to sell the unit they have for survival, there are two possibilities of what may occur at instance. First, people will come with more creative idea than when they are not struggling for survival. It means that the company will work more effectively and produce more money than before. Second, people will get more pressure than usual which may lead to excessive stress. As you can see, even in the most difficult situation, there is still good news you can hear, but that is not the purpose of this third point. We are going to discuss, unluckily, the bad news when people get an extra load because they need to survive. Even though it will depend on how an individual fight with the stress, fact shows us that under normal circumstance, people would turn to make a wrong decision. In a franchise, this means that the franchisor makes bad recruitment decision. This wrong decision includes when they accept new franchisee who may not have adequate skills, experiences, and resources to do the business. 

Everything becomes necessary when it comes to the survival action, even though when we speak about selling profitable franchise assets. However, selling activity does not always mean good things, such as profit generation. Selling action often becomes a blunder to business that does it, especially in adding strain to the business cash flow as well as eliminating the way to success. So, what makes people perform this act?

Profit generation becomes the unifying aspect among all businesses. However, not all businesses have the same perspective about this aspect. Some companies may turn to profit generation by selling their valuable assets when they see no logical way to survive. These companies have already lost their way in recruiting new franchisees with good business skills that may help them in saving the future of the business.

 

You may not have both the mindset and skills a successful franchisor has
Some modern cases show that many franchisors believe business they run as alternative distribution strategy or even the business growth strategy itself. They have more belief in it rather than the true nature of the business itself. This fact shows that these people understand nothing about the business, even though they may have shown excellent jobs in running a business. 
Let’s take business retail as an example. For your information, this business action will only show its best performance when a centralized authority which is small in size makes and implements particular business decision. The analogy of retail business gives us a better understanding than before about how a successful franchisor should do. Unlike retail business, franchise focuses on business decentralization and purchase activities at the lowest level which is the only condition where both franchisors and franchisees can work. That is the reason in order to become a successful franchisor; you should immediately implement the decentralization policy which allows your franchisees to make and apply their own system to keep the business running. It is the most effective strategy if we compare to other possible strategies in a franchise business.

 

A business does not guarantee instant success
Running a business does not only require plenty of assets, but also strong reasons. Even though each of us, as individual, has our own reason in joining the franchise business, it is important to have the right reason: franchise does not ensure immediate way to richness. No matter what the business type is, when you have become obsessed with the money, the only thing you will face is failure whether it comes quickly or slowly. At the other side, when you love the business, make it your passion, and finally give all your best efforts onto it, success is waiting you.

 

Become a sprinter, not a marathon runner
There is one fatal mistake many franchisors make when they run the business for the first time: they expect 2 – 3 years of ROI. For your information, if you want to ‘play’ a serious franchise business, you should wait at least until 7 years before you can fully develop the whole system. Within seven years, you have more than enough time to  monetize your intellectual property, build significant momentum, attain enough royalty, and other important aspects of successful franchise. 

 

Estimate your business demand and value precisely
In a franchise, it is common for people to say, “We do not place our investment in the franchise, but in its results.” This sentence explicitly tells us that instead of the franchise unit, most people choose to join the franchise because they want a better career, life, or investment than they currently have. The bad news is many people do not care about your franchise. The good news is even though they do not have the same passion and love as yours; they are willingly to do everything to develop a franchise business, as long as they can get what they want. As you can see, there is a close, explicit relationship between these two contradictory things, and that is the reason you should build a bridge between them. 

 

Your preparation is not enough
There are many failure cases in franchise when a person decides to run a franchise unit, but they have inadequate franchise training. It is likely that these franchisors have not yet proven one important thing that they repeat their previous success in other product/service markets with assets they have. As the whole section has told you, franchise is an entirely different thing if we compare it to businesses in common. When you have not fully develop your franchise system to cover all business activities, you should know that you ‘do not have any value’ in a franchise business. There is only one option for you: wait until you complete the process.