The Hidden Risk in Franchising: Why “Not Closing” Doesn’t Mean You Won
The franchising industry likes to tout failure risks of 5-10% but I have never seen the data to back it up. In fact, there are franchises where the entire system collapsed making the failure rate 100%. There are also franchises with hundreds of franchisees that go years with only 1 or 2 failures.
In this context, failure is described as “going out of business” but that isn’t a good way to describe failure. Anything short of attaining the goal you initially set is failure.
Everyone who wanted a lifestyle business but are stuck as an owner operator because they basically bought a job is a failure.
Everyone who left a high paying job and can’t get their franchise to scale so they make less than their old salary while working just as hard is a failure.
Everyone who sold for less than a profit and took a step back in their career is a failure
There is likely a lot of these people.
This is the hidden secret in franchising. When you hear about these low failure rates, they don't include the many people who want out, see this venture as a failure, but they can't afford to lose their investment.
In fact, there are people like this in systems that have huge winners. How is this possible? They didn’t understand what a franchise does give them and what it doesn’t.
What a Franchise Gives You
Before you can understand why some fail and some don’t, you need to understand what a franchise provides you. The below list is what a quality franchise provides, so it is assuming you have carefully researched the franchise system. There are hundreds of franchises out there that don’t provide any of what is described below and nearly every franchisee is an owner operator who bought a job.
Quality initial and ongoing support: You learn the business and you learn “business”.
Quality site selection and lease negotiation: The data needed to find the best spot for your franchise if it requires a brick and mortar location
Marketing or national accounts that bring customers to you: this can be digital marketing or a detailed plan for you to follow that has worked countless times before
Clear org chart so you know who to hire, when to hire them, what to pay them, and what their exact job description is: massively important if you want to quickly scale out of being the owner operator
Strong unit economics: You need to consider your goals and the additional financial burden it will place on the business. If you want 10 units, you will need individual location managers, at least 2 district managers, and likely a COO or some other executive staff. If there isn’t enough profit in each location to support all these extra staff and make you a handsome profit, it is a waste of time and money to even try.
Franchisees who have scaled: If most of the franchisees are single unit operators or their biggest franchisee only has 3-5 locations, this brand either can’t scale or no one has figured it out. This can be a proxy for strong unit economics but you always have to do financial projections yourself.
Quality service providers for all the other “stuff” needed to run a business: You should have great partners for a point of sale, CRM, data management, bookkeeping, suppliers, vehicle purchasing, maintenance, inventory/employee tracking, payroll, etc. You should never guess what provider to use because they know which one works best for this business and every franchisee uses the same thing so if you buy existing locations, they will seamlessly blend into your existing locations
What a Franchise Doesn’t Give You
Now that you see what a great franchise provides, you may be thinking wow that has to be a slam dunk business. Not so fast. Here is what a franchise doesn’t provide which means you need to be able to do all of these things.
Capital: You need enough to start the business, working capital to get profitable, and a source of income for your personal needs. If you underestimate this number, you could go under before you ever become profitable. Also, if all this capital is coming from a loan it needs to be balanced against how that payment will affect your timeline to profitability.
This means your household income is derived from an outside source, like a spouse or savings, and you will take a modest salary for a few years.
Management or Leadership: If you need to lead a group of people to make the franchise work and you are a terrible boss, there is nothing the franchisor can do. Without well trained and managed employees, you won’t last long.
Grit: Business is hard even with a perfect plan. Mike Tyson once said, “Everyone has a plan until they get punched in the face.” Owning any business is metaphorically getting into a fight. But you don’t know what time the fight is, where it will be, who you’re fighting, or what weapons your opponent will use. With a franchise, you can call someone who has been through this fight before and will give you the exact techniques you need to win. But they can’t get in the ring for you. Only you can do the work required to solve the problems you will face. If you aren’t gritty, you won’t make it.
Outgoing Personality or Sales Ability: Every owner is the number one sales person in some aspect. If you aren’t selling the actual product or service, you are selling the job to potential employees, you are selling the process improvements to current employees, you are selling managers on higher standards, you are selling everyone your culture. You will typically be trained on any hard sales abilities by the franchise, but if you don’t like dealing with people- it won’t work.
Work ethic: This is different from grit because even if everything goes perfectly it will still be a lot of work. There is no “semi-passive” business when you are starting from scratch. Even car washes and storage units take a tremendous amount of time and effort unless you are giving all your profits to a management team who may or may not be doing a good job. If you aren’t ready to work twice as hard as your normal job for half the pay the first few years, this won’t work. Your long term prospects are much better in a business than a job, but not your short term ones.
Long Term Thinking + Delayed Gratification + High Conviction: Changes, improvements, initiatives all take time. Finding customers takes time. Hiring and training employees takes time. Growing revenue and profits, creating a healthy business savings balance, learning the industry, learning how to run a business in general, they all take time. If you think you are going to open up and become Bill Gates, you are going to give up when that isn’t the case.
First you have to make a large bet on a new business, this takes a large amount of conviction.
Then, you have to continue to do the work without any rewards for months or years
Lastly, you have to repeat this process over and over so you have a big business 5+ years from now
Ability to Follow a Playbook: Some people have to do things their way. They cannot imagine being beholden to the brand standards or someone else or not being able to open a new product line whenever they want. The fastest way to get kicked out of a franchise and lose all your money is to break brand standards. If you can’t follow the playbook, don’t invest in a franchise.
Does Josh Hate franchising?
I am not writing this to denigrate franchising. I just want everyone who invests in a franchise to be successful in the broadest sense of the word. I also think extremely highly of entrepreneurs who have found success in business because they have all the traits outlined above, and more. If you have all these traits and go with a franchise, you are de-risking your business venture massively. You are getting the experience of the last few decades given to you in a few weeks of training then it becomes on demand whenever you have an issue. You don’t need to worry about product market fit, branding, software, suppliers, and the other million tasks a business owner has to get right to succeed. All you do is take a playbook and execute.
I have all those traits listed above and yet I lost all my money and the money raised from friends and family in a tech venture that went south over 5 years ago. I had tremendously talented business people and technical people working for me and I still lost everything.
I now own three territories of a franchise that is doing very well. If, 5 years ago, I took that original investment and bought a franchise instead of starting the tech business, I imagine I would have an empire by now.
Couldn’t I just buy a business
Some people can’t give up a salary so they look for an independent business to buy since it is already cash flowing. If you don’t know how to deeply research businesses (which would require you to leave your job and/or pay professionals a large sum to do for you), there is a good chance you will be raked over the coals by a business owner who knows the ins and outs of his business and wants the most money for his asset.
What happens when you take it over and there is a problem that you don’t know how to solve- the former business owner is on a beach in Costa Rica not taking calls.
Do you have the industry knowledge and training to be successful in this business? Or in business at all? Good sellers won’t sell to someone who won’t run their business well and the bad sellers will offload it to anyone because it isn’t a good business. Not a recipe for success for a brand new entrepreneur.
When you try to do a rollup of other independent businesses, you are going to have to figure out how to join businesses with different cultures, different tech stacks, and different brands into one business.
This is just a short list of potential issues owners face if they buy independent businesses. They are also all problems that owning a franchise would solve. If I was a GM for a painting business and my choice was to buy an existing painting business or start a franchise location from scratch- I would likely buy the existing business, given it’s large and well run.
If I had no experience in running a small business I would almost always go with a franchise, provided I have all the personal traits listed above.
What Is The Takeaway
Before you get into any business, you need to have an objective personal review to ensure you have all the traits listed above. If not, there is no shame. I have friends who have worked up the corporate ladder, made smart investments, and are millionaires with flexible jobs. That is a great life outcome. If you do have the needed traits of a business owner, can go a few years with a modest salary, and want to get into business- you should seriously consider franchising.
If you try to figure this out alone, you’re gambling six figures on blind spots you don’t even know you have. If you want to lower your risk, the next step is simple—talk with someone who knows where those blind spots are
At Tracer, we help serious buyers cut through the hype and find the franchises with the right unit economics, scale potential, and fit for their skills. Franchisors pay us, so it costs you nothing—but it could save you everything.
To learn more or book a call with a franchise broker, visit www.tracerfranchising.com
