What does it take to be a successful franchisee? Every year, eager franchisees open their first franchise location only to close the doors less than 12 months later. While it is difficult to track numbers specific to the QSR industry, the National Restaurant Association estimates 30% of new restaurants close within the first year. Why do one in three restaurants fail and how can QSR franchisees ensure their business is successful?
Why do franchises fail?
Franchises can fail due to undercapitalization, ineffective leadership, over-leveraging, and over-commitment.
Reasons for Failure
Franchisees can fail due to undercapitalization, ineffective leadership, over-leveraging, and over-commitment.
- Undercapitalization may occur when franchise owners fail to consider the ‘soft costs’ of operating a franchise or if they withdraw too much cash from the business. New franchisees (or established franchisees opening a new location) may allocate funds for obvious expenses like real estate and equipment, but neglect to account for marketing and employee training costs. Other franchisees may have very profitable franchises, but they take too much of the profits for themselves. Then when a crisis arises, there isn’t enough cash to keep the business operating. Instead, franchisees should refrain from pulling too much cash from the business to avoid business failure.
- Ineffective leadership may lead to high employee turnover and staffing issues. Franchisees who micro-manage can drive away quality employees. On the other hand, absent franchisees may also lose their business. Without strong leadership from the franchisor or location management, employees may be more likely to help themselves to the cash register or neglect to follow procedures. The cost of frequently hiring and retraining staff may be the end for a franchisee no matter how good their intentions were starting out. For franchisees struggling to hire staff such as general managers, there are assessments and resources available online to help franchisees determine the strengths and weaknesses of an individual looking for a career in franchising. These assessments will help franchisees identify who may be a good fit for their business.
- Over-leveraging is too often the reason franchisees fail when they use debt to start or expand their business. Excited by the prospect of opening a new location or purchasing new equipment, some franchisees borrow more debt than they can repay. It is important that franchisees work with lenders and consultants who can help them determine how much debt they can take on without over-leveraging the business. First Franchise Capital® has the expertise to work with franchisees to analyze a debt to EBITDA ratio that will permit franchisees to pursue their growth goals.
- Franchisee over-commitment in too many enterprises at once often leads to failure. Spurred by the success of their franchising business, some franchisees overextend and as a result, the business begins to suffer. Diversification of brands and industries is an excellent franchising strategy, but only when franchisees are fully prepared to manage the nuances required for each new opportunity. Franchisees can avoid over-commitment by fully educating themselves before they begin a new concept and making sure they have sufficient staffing to manage all their operations.
Franchise Success Strategies
So what does a successful franchisee look like? Jon McClure, Vice President of Sales for First Franchise Capital, identified some key characteristics of a successful franchisee. He said, “To succeed, you've got to be committed, engaged, and you have to have excellent people working with you. The business of QSR is built on people from the drive-through staff to the GM. You need to hire the right people who have an interest in food and have good people skills.” The best franchise teams are built when the leader uses “we” instead of “I” language when referring to the successes of the business. John Maxwell said, “A leader is the one who knows the way, goes the way, and shows the way.” This philosophy is certainly applicable to franchising where leaders who are willing to help clean the floors are often more respected than the manager who is unwilling help his or her team.
In addition to strong leadership skills, successful franchisees also have realistic expectations for their business. They understand a successful franchise business comes only through hard work and consistency. Franchising often requires long hours and should not be considered a “get rich quick scheme.” Franchisees who understand this before entering the business are well on their way to a successful business. One of the best ways to set realistic expectations for franchising is to talk to experienced franchisees. Talking with other franchisees will not only help new franchisees learn the ropes, but franchisees at any level can benefit from building relationships in the industry. The QSR industry is filled with helpful experts and great resources to help any franchisee become the most successful they can.
Funding for Future Growth
If you are a successful, multi-unit franchisee looking to grow your business beyond organic means, First Franchise Capital is here to help. We can help guide you to the loan solution that works best for your growth strategy, without overleveraging your business. Contact one of our experts today!
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