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Aug, 01 2007

Why franchisees fail

FOR many, franchising is a magical word that spells success. But to attain success is not easy as there are some unhappy stories in franchising too.

FOR many, franchising is a magical word that spells success. But to attain success is not easy as there are some unhappy stories in franchising too. Any business, to make it successful, needs to be projected well. But what are the reasons that give franchising a bad name?A few unsuccessful stories have put a stigma on the name of franchising. At times a tussle between the franchisor and the franchisee leads to such a situation. A franchisor or franchisee needs to analyse his/her expectations from the business well in order to make it a successful venture.

Besides the franchisor and the franchisee, certain external factors on which the franchise business depends, are responsible. Below we chart out certain reasons identified for the failure of a franchise business and what to avoid. If you want to take up franchising do not just look at successful stories, for, good lessons can be learnt from unsuccessful stories as well.

External factors

If we analyse the contributory factors for failure of a franchise business, 25 per cent of it is caused due to external factors. External factors would mean certain situations or norms which arise over a period of time due to factors which are beyond the control of the franchisor and the franchisee. For any business to be successful the actual calculations should be done beforehand keeping in mind these factors. Here are some of these factors.

Regulatory controls

The very important contributory cause in external factors is regulatory controls. Regulatory controls are regulatory mechanism of the government which rule the business. Government norms in a country like India keep on changing and which affect the business. Certain sectors like petroleum and telecom, are highly affected by regulatory controls. For example, FDI regulations play a decisive role in governing the future of foreign players in India.

Reliance petrol pumps is a case in point. The company failed to get subsidy for petrol from the government and which was easily extended to the PSUs.

Industry changes

Certain regulations, or norms have such an effect on a few industries that the companies in this sector have to back out. Before investing in an industry it is important to analyse it well to get a fair deal. Major industry changes affect the businesses in a hard way. Regulations play a major role in this regard. It is better to strategise in advance so that industry changes don't leave a scar on the business.

Volatile market conditions

Changes in consumer pattern, weather conditions, combine those market conditions which turn volatile and in turn affect the businesses related to it. Such conditions poorly affect the concerned business and at times it becomes difficult to keep afloat under such conditions. A challenging environment affected by the country's consumption pattern or change in interest rates, or employee wages are certain other factors which directly affect a business. Retail boom in many countries later on affected many big players of the market. If market conditions continue to be volatile over a prolonged period then it badly affects even the biggest players of the market. Current situation in retail and real estate is also a result of this boom. Before investing in such kind of business one should research well whether it is a temporary explosion of the market or is it long-lasting.

Dot-com, a fast emerging hot business for all the I-T companies attracted many others who were not actually from the I-T sector. Everyone wanted to ride high on the I-T boom. The I-T industry boom attracted many big and small players but soon the bubble busted. Even big players like NIIT and Aptech faced a slowdown due to the market. Every industry has its own pros and cons. The I-T slowdown was a tough lesson for all the companies. Many top-notch companies in India wanted to get into the market to gain some success. Examples like S Kumars.com have imprinted an unhappy story on our minds.

Causes by franchisees

The other reasons cited by experts for failure in the franchise business are due to franchisees. A franchisee affects the failure of the business for around 25 per cent. Some reasons are listed below:

Mismatched expectations

Mismatched expectations are not only the reason for failure in the franchise businesses, it is also known as the most common disputable subject between the franchisor and the franchisee. To avoid such issues, it is better to communicate well regarding what you can offer to the franchisors and whether the terms and conditions laid down by the franchisor are acceptable to you or not. At times a lucrative contract can also later on lead to mismatched expectations. If a franchisee is unable to keep with the expectations of the franchisor it will surely turn the relationship sour.

Unwilling to learn

The franchisor has been in the business for years, and understands the market and target consumer well which he further wants to transfer to the franchisee to make the business better. But if the franchisee is unwilling to learn, he will stop growing and it will further harm the business. Most of the franchise programmes arranged by the franchisor fail to bear any fruit as the franchisee is not receptive to the suggested ways.

Unwilling or unable to keep up with the systems

A franchisee who is unable/unwilling to keep with the systems will lead to disgruntled customers that will not be a positive aspect. The franchisor's system needs to be followed well so that the outcome of the business is as per expected. If the franchisor's systems is not reciprocate with, then he will not be interested in the partnership any further.

Not maintaining operating standards

Standard Operating Procedures is the keyword in a franchise operation and the way to get consistency in all the operations. If McDonald's franchisees do not maintain the operating standards, they would not have achieved success. In the fast food business, operating standards act as the most crucial part. Customers are attracted to only those food chains which are loyal in maintaining operating standards. In franchising, there are set parameters which form the business model and if a franchisee follows them religiously then only he can tread the path of success.

Poor location

To make a business successful three aspects are important: Location, location and location. Even if the best brand is under the franchior's kitty the business is likely to fail due to poor location. While spending money in buying a franchise, make sure that poor location does not mar the chances of success.

Causes by franchisors

While 50 per cent of the causes of failure in a franchise business are caused by external factors and franchisees, rest of it is due to the franchisors. Here's why.

Poor systems

Poor systems can never attract good business. Most of the franchise businesses fail due to the poor systems of the franchisors. A poor system is actually a danger in place. One should always go for better and competent systems in place which can support you in the long run. A good franchisor will always provide you comprehensive and tested operating systems which go a long way. Every franchisor claims to have a "unique and proprietary" system that helps a franchisee.

Under-capitalisation

Under-capitalisation is the main reason of failure in business. Under-capitalisation is lack of operating capital to sustain a business. Many companies initiate franchise operations just to help their operations and get expansion done on the money of the franchisees. However, when it comes to proving support and help they fail to do so as they are under capitalised.

Failure to keep promises

While signing the documents franchisors make a number of promises comprising of the support and training they would lend to franchisees. But few appear to keep it. Avoid making promises that cannot be kept. If the franchisor has made written promises of providing material/support/training but fails to do so then a franchisee can take legal action against him. Make sure that everything is in black and white and not just verbal claims. Also ensure that the clauses written in the agreement are not only in the favour of the franchisor. Get it examined from a lawyer specialising in franchising.

Exploitative mindset or high-handedness

In the world of franchising there are two kinds of franchisors:

Companies that have proven effectiveness in executing a business strategy and seek to expand their business by offering franchises to other small business owners Companies and individuals who are merely looking to make a quick buck at someone else's expense Successful franchises begin with a viable franchising system. Some franchisors peddle business strategies that were never able to achieve profitability in single location, let alone in multiple ones. So, before striking a deal, it is mandatory for both the franchisor and the franchisee to do some legwork to evaluate the viability of the project. Keen market survey, aggressive promotion, proper choice of location, transparency of the franchisor-franchisee relationship can then only spin a successful story. Some big companies had initiated into franchising, but were not successful in implementing the format. Not receptive to franchisee ideas The best way to determine the right franchisor is to see whether he is receptive to the franchisee's ideas or not. A good franchisor will always reply to this question. Also ask whether such suggestions have been applied in the system or not. A franchise can contribute well in a franchise system by making relevant suggestions, one must see whether this franchise right is extended by your franchisor or not.

Inadequate marketing programmes

Necessary marketing at regular intervals is the key to success for any business. An ineffective marketing strategy of the franchisor is itself a proof that he is not taking the business seriously.

Not keeping up with market trends Keeping up with the pace of change is the key to success in any business. Consumer market is ever-changing and needs to be followed well to keep your business up-to-date. A good franchisor not only knows his market well but also gets regular R&D checks done to keep abreast of the latest trends.

Advisory

Franchising though known as one of the successful methods of doing business still needs proper functioning in all the respects whether it is from the franchisor's or the franchisee's side. Even if both the parties, i.e., the franchisor and the franchisee, do much to make the business successful there are certain regulatory norms that are beyond the control of both. It is more appropriate to plan the business in advance so as to avoid any crisis from the start. Similarly, factors that do not work well for the business should be examined in advance before proceeding.

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