We’ve all experienced it—driving around your town to see a popular chain or new spot go out of business. In fact, thousands of franchises fail every year. The rate of franchise failure is only about 6% lower than that of independent small businesses. So with franchises opening at a rate of about 700,000 per year, that means about 4,200 are closing their doors as well.
With all the research and technology available in the market today, why do so many franchises still fail? Let’s take a deeper dive into the factors that play into this failure rate, and explore key tactics franchisors and franchisees of all skill levels can leverage to become successful.
1. You are not prepared
This is a huge reason franchises fail and is an easy one to avoid. Do your research both before opening your franchise location and after you are open. Even after years, you still need to stay on top of what is happening in your franchises and what you can do to improve. Some people open a franchise because they love the product or service, or love being a customer at a particular store. However, there is a big difference between loving a customer experience and loving the challenge and struggle of running a business.
You may love the product and feel passionate at the start. You also need to consider evolving the business, competing in your space, managing and retaining staff, and maintaining the profitability of your franchise. Prepare ahead of time to make sure that you are as ready as you can be for the challenges that come alongside.
Many franchisees refuse to create a business plan or, if they have one, stick to it. A business plan should be your road map that guides the way to profits and milestones. You should be a part of the planning process and be prepared to uphold it. Be sure to analyze your most important KPIs in real-time and refine as time goes on. Don’t settle for just monthly or quarterly reviews. Successful franchisors and franchisees leverage cloud-based or on-premises management platforms to connect all of their POS, accounting, inventory, and HR applications in a single location. Access to up-to-date information and automated coaching alerts will help you be prepared for changes in your business and market.
2. Your area is oversaturated
Did you know that one Chick-fil-A location makes more than a McDonalds, Subway and Starbucks combined? There may be many reasons for that, but one of the big ones is that Chick-fil-A only operates about one sixth the number of locations that McDonalds does. We’ve all passed a Chick-fil-A to see the line wrapping around the block, while there is usually another McDonalds just a few miles away.
Choosing the correct area for your franchise is important. While the above mentioned are some of the largest franchise chains in the world, this can still apply to smaller franchises. How close are other locations? Map this out to see if you have the audience and customer base you need.
Be sure to conduct a feasibility study before you open your doors to see your potential customers, audience and location mapping. This could help you a lot in the long run!
3. You’re jumping on a trend
Just a few years ago, every town across America was overrun with frozen yogurt shops. They were popping up everywhere, but now most of them are gone. The same can be said for other trendy food and drinks, gyms, and more. When deciding what type of franchise to open, don’t simply hop on what is cool at the moment. You will have customers that try it once as a novelty, without the longevity in your customer base.
Quite often, people fall in love with a franchise brand, product, or trend first and then convince themselves that there is a market to support their love interest as well and a bad business choice is made. Not every town can support an edible cookie dough shop and that is okay.
In order to create a lasting franchise, find something with some staying power and loyal followers. Try a franchise that has some time-tested products or services people love, while also offering exciting innovations and interest in evolving. Most importantly, stay on top of your metrics and franchise operation. Regular, honest review of your key performance indicators can help you make the necessary changes to your franchise before it’s too late.
4.You aren’t measuring your strategic operational information in real-time
Maybe you have one or two locations, dipping your toes into franchising, or maybe you have 100 locations across the country. Either way, you need to be tracking your critical operating metrics. When franchises allow changes to their most vital KPIs to go unnoticed, that is when they start to fail or you have crises in staff, sales, or profit.
Having a franchise operational success platform allows you to understand what is happening in your business and what to plan for in the future. You can identify trends in sales and staffing turnover and keep an eye on real-time metrics that concern you. If you are managing a large number of franchises, you can keep track of who may be in need of more coaching and training, and increase your direct communication as a result. This can build trust between franchisors and franchisees.
About 20% of franchises fail every single year. Don’t become a statistic—instead, ensure you are prepared for the changes happening in your market and shift your focus to maintain your competitive advantage. The first and most important step you can take is to unify all your systems and applications under a single franchise success platform. Creating transparency and tracking your metrics in real-time will empower you to thrive and succeed.