Will Your Franchise Be a Turn-Key Success, or Failure?

money-48103_640Winning business ideas aren’t easy to come by and that’s a major reason that purchasing a franchise can be so tempting. If a company has been selling franchises for many years, it must have a successful business idea and model, right?

There is indeed some truth in this, but within any franchise concept there will be very successful operators as well as many failing or struggling operators. This means you must be very careful, whether you’re licensing a franchise directly from the franchisor or buying an existing franchise business from its current operator.

For example, I remember a successful local deli that had multiple locations and decided to franchise its concept. They did all the legal work required to start a franchise business and soon had several franchisees up. However, the company was jointly owned by a husband and wife, who ultimately divorced. Like their marriage, their business went belly up and the franchisees lost their investments, which for many was their entire life savings.

Turnover rate alarming

Franchise operations can be a very mixed bag. Even the most successful franchises have their share of duds. Further, a recent analysis of turnovers within the industry revealed some alarming statistics.

The turnover rate for the four years beginning in 2010 and ending at the end of 2013 was 122 percent, with more franchisees leaving than opening. “Turnovers” include terminations, transfers, non-renewals, re-acquired and ceased operations. During this period of time, 135,289 franchises opened while 164,832 franchises closed their doors.

The data indicate that many franchise operators, like the victims of the failed marriage/business that I mentioned above, end up going out of business well before their contracts are up. Contracts are often for periods of about 10 years.

Certainly there are many problems that contribute to this alarmingly high number. The economy has been tough on small operators across the country. Also, some critics say franchisors need to focus more on supporting their franchisees than selling more franchises. Further, some operators go into the business without appreciating what it will take to achieve long-term success. Tragically, those who don’t make it can lose much more than their franchise fees.

Buyers beware

People can get a franchise location through the original franchisor or when a current franchisee decides it’s time to sell the business. In both cases it’s critical that buyers truly understands what they are getting into. When establishing a new location, it’s always an educated guess if the territory will ultimately support the franchise. Buyers need to find similar locations and see how well owners are doing.

When existing owners are selling the critical thing to know is why. Are they successful but just ready to move on or retire, or is the business struggling? Owners won’t tell you that their business is a dog and they desperately want out. Buyers need to be very thorough in their analysis. If they have experience turning around poorly managed businesses, they might be able to negotiate a good price and do well. However, losing their money is probably a more likely outcome.

The takeaway here is that despite being often advertised as “turn-key” operations, the franchise door that the “key” opens doesn’t always lead to profits, so be careful and get guidance from experienced and trusted advisers.

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