How to Avoid Failing in a Franchise Business

1. Examples of failure

What are examples of failure in a franchise business? Mainly there are 3 reasons that they collapse. “Fundraising problems”, “change in environment” and “beyond the owners’ capabilities”. By knowing these reasons and making preventions, you can minimize the possibility of failure. One should be aware of such risks.

1-1. Insufficient funds

One of the main reasons for failure in a franchise business is insufficient funds. In terms of time, this problem occurs at relatively early periods.  

The typical reasons for insufficient funds are “initial funds costed beyond the expectation”, or “running cost estimates were not accurate”. If you start a business with no margin of funds, the possibility of failure will increase. It is recommended to start your business with a plan with an accurate margin of funds.  

Whatever reason you have, you won’t be able to pay rent, labor costs, nor purchase materials and maintain management if you run out of capital. In this case, it is natural that you will not be able to continue your business. In the worst scenario, you will have no choice but to go out of business. If you fall into running short of money, whether you can get funds externally or not, would be a key point in continuing your business.

1-2. Change in environment

The biggest reason of failure in franchise business are “changes in environment”. There are 2 types of such changes, the first being “openings of other stores in nearby areas from rival companies, or even the same company”. The second reason is “changes in market environment”.  

The former one happens a lot in the convenience store industry. In this industry, which has keen competition, especially in urban districts, it is quite normal that a store starts next to a store from another company. Even more, sometimes a large-scale store starts from same company.  

However, if you already have been able to obtain your regular customers from the local area, it should not cause huge damage. The amount damage shows how much your policy of management works.  

In reference to the latter difference, for example, the rise of e-commerce or the development of new technology, these phenomenons happen normally, and are not special cases.  

1-3. Beyond their capabilities

When franchise management is beyond the owners’ capabilities, the management will fail. The owners’ capabilities will be put to the test when they run their stores.

In addition, when they hire some employees, they will need the ability to manage their employees. It is very difficult to hire staff and to work together. Its difficulty could be beyond your imagination. If the owner hasn’t experienced any management roles, they tend to lack this skill. You need to know that the skills of a manager, and the skills of an employee are completely different.

 Even if they have these skills, sometimes they make mistakes by choosing the wrong industry and/or franchise. For example, they choose an industry that they cannot deal with, or a franchise that doesn’t give backup as much as you expected. It is the very first mistake that can be made when starting businesses, but in a broad sense, we can say that it was a lack of management skills by owners.

2. Things to do in order not to fail in a franchise business.

What should you do in order to not fail in a franchise business? Here you will think about it from 3 points of view, “fundraising problems”, “collecting information”, “inner resources as a manager”.

2-1. Efficient fundraising

In order not to fail in fundraising, you need to “make an accurate estimation of funds” and “run your store with spare financial resources”.

When you borrow some money because you cannot afford all the funds by yourself, it is important to think about operation funds. It is also important to consider which company to borrow money from. You need not only see the amount of money being borrowed, but also the interest rate. If you borrow money from a company that has high interest rates, your situation could gradually become worse if you do not have a good management.  

There are also cases where you can use subsidies. You can use them especially when you start a business locally. You should search these out and make most of them smartly.

2-2. Gather information before you start a business.

People call modern society the Information Society. This means that the skill to gather information will have a lot of impact on whether you will fail in a franchise business or not.  

Before you start a business, there will be an estimation of sales volume, but you need to test its reliability. One of those estimations should be based on the average sales amount of existing stores in your area, or the sales amount of the stores that are near your area.  

If the analyzation is on the characteristics of a local community, it could have a much larger difference between the estimation and reality. It is important to think about accuracy of information by yourself, just not to believe the given information as it is.  

Also, you need to think about all the risks with starting a franchise store. By taking all risks into consideration, the possibility of failure will decrease.

However, there is a limit of gathering information only by yourself. You can ask specialists of law, management and the industry to help you.

3. Summarize / Re-think about independence and opening a business.

If you rush to start a business, it tends to fail. Before you make decision, you need to take a breath and rethink whether you really want to make a contract to start a franchise business. To run a store, you must have inner resources as a manager. You should think whether you have this skill or not. If not, it is too dangerous to start a business. You need to remember that “All the things that could happen is your own responsibility.”  

The people who succeed in business are not the people that are too stubborn, but the people who listen to their supporters and can make efforts by themselves and solve problems.

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