Question: I almost bought a franchise from a company three years ago but decided the timing wasn't right for me. I recently tried to contact them again and found that they'd gone out of business. Why do franchise companies sometimes fail and how can I protect myself from buying a franchise from one that might go under?
Answer: Just as there is no absolute guarantee that you'll succeed as a franchisee, there is no guarantee that someone starting a franchise company will succeed. The easiest way to answer your question is to first start by identifying the four stages of growth that most franchise companies go through.
The Idea. Every business starts with someone having an idea of a better or more unique way to deliver some product or service to customers.
The Prototype. Most franchise companies precede their franchising efforts with the establishment of one or more prototype units they set up to test, refine and prove the validity of their idea.
The Early Franchising Efforts. After successfully completing the prototype stage, most franchisors have their biggest struggle of all during the early franchising effort to establish their first 10-25 new franchisees as successful operators.
Critical Mass. This is everything that comes after a franchisor has at least 25 or more successful franchise operations in place.
There is no sense beating around the bush. As a good general rule, the earlier you get involved in any business going through these four phases, the greater the risk of failure. After completing the first three phases above, most franchisors have gained enough mass and experience in their operations that they are far more likely to survive and succeed. For more information on why this is true, you can reference another article I wrote at this site called Evaluating New Franchises.
Having said that, let's focus solely on franchise companies that have graduated to phase four. You can greatly increase your chances of success in finding one that will be around for the long term by carefully looking at the following factors:
First and foremost, find out how happy and financially successful the existing franchisees are. Make sure to check this factor very carefully since you'll probably end up much like them if you become involved. Also, make sure they verify that they have actually become financially successful, not that they're expecting to become that way soon. We're looking for proof here, not hope, and newer franchisees are notorious for having unrealistic expectations about their business until they actually start getting profitable results.
Next, make sure that the existing franchisees believe that the overall orientation of the franchisor is that its success is based on the success of the franchisees. Get plenty of examples from them of how this attitude is shown through actions in addition to words.
Finally, look carefully at the support infrastructure of the franchise company, especially in relation to operational support. How long have the support people been around, what was their prior experience, and how confident are you, and the existing franchisees you talk to, in their ability to help grow your business. You're paying a lot of money for this support and you don't want to get into a "blind leading the blind" scenario.
Most franchise companies become much more stable by the time they get into this fourth phase of their growth but that's no guarantee of success for you or for them. If they also have the right attitude and the right focus in their business, you'll both have a much better chance of success.
It's more work for you to go through a complete investigation to make sure that these essential factors exist in a franchise opportunity. You reward for doing this extra work is that you will be much better protected from buying a franchise that might go under.
