What causes franchises to fail?

[OmnivoreInk]

I remember hearing that most new businesses fail in the first year...usually due to money issues.

(I've been hearing that for many years, I suppose it's common sense that that would be the case.)

I suppose that's the same for franchises? Once you buy a franchise, it probably takes about 5 years before it becomes profitable...if you don't have the cash to keep running for all that time...you go under.

[franchisebrief.com]

I remember hearing that most new businesses fail in the first year...usually due to money issues.

(I've been hearing that for many years, I suppose it's common sense that that would be the case.)

I suppose that's the same for franchises? Once you buy a franchise, it probably takes about 5 years before it becomes profitable...if you don't have the cash to keep running for all that time...you go under.

While there are no statistics on this I would assume you are right; it probably takes 5 years for a franchise to become profitable, like any other business (in general).

However, it has been proven that chances of success are higher when buying a franchise rather than when you start your own business. Franchising provides a proven business model which is why the success rates are higher.

[Nana]

Another reason franchises can fail is due to lack of effort on the franchisees part. If the franchisee does not give it their 110% and purely imitates rather than innovates they will increase their chance of failure.

[franchisebrief.com]

Another reason franchises can fail is due to lack of effort on the franchisees part. If the franchisee does not give it their 110% and purely imitates rather than innovates they will increase their chance of failure.

I agree. Sometimes franchisees rely too much on the franchisor. They think the franchisor will run their business. Wrong! The franchisee is responsible for manging day to day operations of his franchise location.

[BizLoanz4u]

Though it's true a large portion of new businesses lose money the first year, most go on to break even the first year or even are profitable. If you have a good franchise on your hands and manage the business wisely as well as utilize all that the franchise system has to offer (such as on-going training and support), It would not take 5 years to become profitable.

I work with franchisees on a daily basis in getting them funded. We have a lot of repeat business and receive multiple loan requests for 2nd and 3rd locations, typically within 1 - 2 years of when they began their first unit. I review their current business financials and rarely have seen their first unit losing money after the first year. Generally they break even the first year and become profitable after that. I've even seen great success straight away and have seen franchisees open a 2nd unit within 6 months of the first, because they were already profitable by then!

I think it mainly boils down to how you manage and making sure you have enough money to cover yourself the first year so you don't go under.

There are loan statistics, and I have statistics on over 320 franchises (loan failure rate) and 298 of them have only 8% or less failure rate...so, for the most part, they are decent statistics. Worst on the list with over half their loans defaulting (55.26%) was a soup & sub shop type franchise and a bed & breakfast type franchise with nearly half (44.44%)! I cannot name the franchises exactly, so please do not request it. FYI- Lenders prefer to approve loans for franchises that have under 8% failure.

[David Castro]

However, it has been proven that chances of success are higher when buying a franchise rather than when you start your own business. Franchising provides a proven business model which is why the success rates are higher.

You have to know what you are getting into, have to be patient and have perseverance. You will fail when you stop trying.

[Sebastien]

You have to know what you are getting into, have to be patient and have perseverance. You will fail when you stop trying.

I guess this is true for any business.