Some Reasons Why Franchisors Fail

failure-2Assuming proper capitalization and diligence in establishing the original business concept as a franchise sytstem, in my opinion, there are two simple reasons for franchisor failure.

One, franchisors don’t treat the franchise relationship as an interdependent realtionship where success at all levels in the organization is dependent on each party to the franchise agreement. Ignoring this fact causes franchisees to feel they’re treated like unappreciated employees, breaks down communications and ultimately fractions the system itself. This results in untimely royalty payments and focuses franchisor’s attention on collections and possible legal actions.

Second, franchisors, especially startups, whether out of necessity or overzealousness, use the practice of checkbook franchising. That’s the difference between selling a franchise and awarding a franchise. Just because a franchise candidate has the funds doesn’t mean he will be successful as a franchisee. Too many of these franchisees cause problems in all areas and affect the system as a whole resulting in closed units and legal problems. Both of which must be disclosed in disclosure documents that ultimately affects franchise sales.

In the end, franchisors experience reduced revenue streams in both royalties and franchise fees while increasing legal expenses. Once this cycle begins it’s extremely difficult to stop without drastic change.

About Paul Segreto

Entrepreneur, Franchising & Small Business Professional, Top 100 Champion Small Business Influencer Awards 2014 & 2015, Popular Blogger & Podcaster
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