Small businesses have a disproportionately high failure rate in their first three years of operation. While franchises may be less likely to fail, they’re certainly not immune.
“The three major reasons are: the wrong location, an ill-suited franchisee and an unproven concept,” said Anita du Toit of Franchising Plus. “The “location, location, location” mantra is also true for franchises, specifically in the case of retail franchises. The franchisor should assist in site selection and should use scientific or proven ways of choosing a location based on previous experience.”
But sometimes the problem lies with the franchisee. “Franchising is not for everyone, as it requires a great degree of compliance and more entrepreneurial people may find this frustrating. On the other end of the spectrum, some people are not suited to life as an entrepreneur and the risks associated with this,” she said.
Franchisees should also be on the look-out for unscrupulous franchisors. “It’s important to ask the franchisor how long the concept has been operating and the franchisor should provide a disclosure document with detailed information on existing franchises and financial implications,” said Du Toit.
If you are already involved in a franchise business, it’s vitally important to protect the relationship with the franchisor. The success of the business relies on the strength of this relationship, and disputes can jeopardise profitability.
A common mistake made by the franchisor is to neglect those franchisees that are doing well, said Frank Orchard of Standard Bank. “It is a common error of franchisors to focus attention on the ‘problem’ franchisees, while neglecting those who are operating efficiently. All franchisees pay the same royalties and therefore deserve the same amount of attention and service from the franchisor. A lack of service from the franchisor can result in the breakdown of the relationship.”
Because disgruntled franchisees often attempt to rally others against the franchisor, a strained relationship could cripple the entire network. A dispute resolution clause in the franchise agreement would make sure that any problems are swiftly and properly handled, suggested Orchard. He said this is a surprisingly recent addition to most franchise agreements. With the rapid expansion in the local franchise industry, franchisors are often focused on the immediate growth of their operation, rather than on the relationship building required for a successful partnership.
Once a franchise dispute has been elevated to a legal argument, the franchisor should ensure that other franchisees are kept in the loop and that developments are communicated regularly. Transparency on the part of the franchisor is more likely to lead to trust on the part of their other franchisees, he advised.