franchising aspects Nov, 23 2009

Drawbacks of guaranteed financial success

The concept of franchising is becoming extremely popular due to various reasons. One of such reasons is its return in terms of profits to the franchisee as compared to any independently owned business. But many a times, it is often found that the franchis

By Abha Garyali
Sub Editor
Drawbacks of guaranteed financial success

No doubt, franchising has infinite benefits both for the franchisor and the franchisee. But, it has some drawbacks too. One of such drawbacks (as perceived by franchisees) is that the franchisor can not guarantee the success of the franchised outlets. He/she may assure the franchisee and provide cent percent support and guidance, but the franchisor can never give guarantee financial success in any written document (franchise agreement).

Break-even period

Break-even period is a useful tool, which gives the franchisees a tentative idea of its return of benefits.  Mostly, all parent companies provide a break-even period to the franchisees.  When a franchisee invests in a business, apart from thinking of making profits, the franchisee also has to incur the cost of franchise fee plus other investments he had made. Most franchisors mention about the break-even period in the franchise agreement. This can range from three months to three years or more. But on the other hand, it does not mean that the franchisee would start collecting profits from the exact date of his/her completion of break-even period. Sometimes the outlet can be slow in picking up, in such situation; the franchisor with the franchisee can explore ways for gaining success. But, none of the franchisors can take the responsibility of giving any clause in the franchise agreement for guaranteed success. A number of things can go wrong with the franchise. These are as follows:

Causes of franchise failure

Most franchisors are unable to guarantee success to its franchisees. Also, many a times one can face failure on the same way on which others had been successful. Therefore a franchisor can not be blamed for the failure of any franchisee. Some reasons for the failure of a franchise store are given below:

Franchisee: The franchisee is responsible for making his/her outlet a success. As the franchisor provides the franchisee with brand name, experience, training and services, but the success or failure of one’s outlet also depends on the strategic potentials of the franchisees. Thus, franchisee cannot wholly depend on the franchisor for its success or failure of his/her outlets. Such dependency of the franchisee on the franchisor is a major hurdle for the functioning of outlet.  Also, in such situations if the franchisor had given any guaranteed success, he/she may have to face reverse consequences.

Location: Location being the most important criteria for the success or failure of an outlet plays a significant role. Some franchisees try to reduce the cost of a franchise by taking a location which is not favourable for the business. The franchisors should always be involved with the site selection to maximise profits.

Self sufficiency: Another reason for the franchise failure can be that the franchisees sometimes do not take heed of the franchisor’s advice. They believe that it is their independent set-up and are free to make as many changes as they want. Franchisors should make regular interventions for its proper functioning.

Recession period: Suppose the franchisee has done whatever it takes to make his/her business run successfully with the full cooperation from the franchisor and recession has hit the market. In such adverse situation, the franchise may face failure.

Besides these there are some other issues like the lack of business acumen, management skills, ability to delegate, skill to motivate, or lack of working capital needed to succeed. In such cases, if the franchisor had given any written guarantees to the franchisee may have to pay back the money. Therefore, it is advisable for the franchisors not to give guaranteed financial success to the franchisee in the franchise agreement or in any other written documents.

Related: Outsourcing HR services

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