Why Some Franchises Fail

Franchising is growing. This year alone, the Canadian franchise industry is projected to grow by 2.59% ($+2.5 billion net increase), putting the total franchise-GDP contribution to $100.6 billion

But that doesn’t mean success, as a franchisee, is guaranteed. Like any business investment, franchises can fail. Here are 3 common reasons why this may occur:

1. Choosing the wrong location: When it comes to franchise success, setting up shop in the right spot is something that should never be taken lightly. Who is your target audience and what location is best to reach them? Where are your competitors located? Are there any barriers (i.e. difficulty finding a good parking spot) that will affect your franchise? Understanding everything you need to know about your location is key to franchise success. 

2. Not putting in the time and effort: Some entrepreneurs buy a franchise with the belief that the business will run itself. This mindset will likely lead your business to failure. Despite the support you’ll receive from the franchisor, the most successful franchisees are actively involved in their business. Taking on a more hands-on approach and putting in a consistent daily effort each and every day can help you maximize your chances for business success. 

3. Underestimating costs: Undercapitalization is one of the biggest reasons why franchises fail. Without projecting your potential capital needs or understanding your cash flow (the amount of money going in vs. the amount of money going out), the risk of failure is imminent. Before investing in a franchise, consider creating a financial plan that includes a cushion of capital to get your business through any bumps you may encounter along the way.  

There a number of reasons why a franchise can fail. But if you watch out for those three common mistakes, you’ll increase your odds of running a business that thrives.