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The franchise has a moment. During the economic disruption caused by the pandemic, the franchise business model has proven to be attractive. It is a less capital intensive and more diverse way to scale a business concept. As a result, the U.S. and Canada are currently experiencing a massive increase in new franchise systems.
But there is a problem: too many franchisors never become a successful franchise system in good faith. The numbers don’t lie: 67 percent of all franchisees that launch don’t sell a single franchise in their first two years. The average number of units after 10 years? 10. And only five percent grow beyond 100 units. We have no problem starting the franchise, we have a climbing problem.
Here at my company, we are motivated to understand why the franchise’s success rate is so low and to improve it. Starting a new franchise business is a big part of what we do. We have launched and grown our brands in hundreds of units. We also analyze dozens of new startups each year, annually choosing a group of 10 promising companies to help launch into the franchise universe.
Related: 6 lessons learned from the franchisors that were launched in 2020
I created a thriving business. How different can the franchise be?
During the next articles in this series, I will describe the main challenges faced by franchisors in the start-up stage. But I want to start by sharing the root cause of the multiple issues that make it difficult to launch new franchisors. Let me guide you through the classic start:
You are very successful in your local business and have spent years building a great name in your community. You have experience in your space and the locals come to you. As Malcolm Gladwell wrote in his 2008 bestseller, Outliers: The Success Story, you put your “10,000 hours” to get where you are. Chances are you will succeed and make good money. Friends and customers keep saying you should franchise this or ask when you will.
One day you decide to go there. Your thinking is, I’m great at this business, how different could the franchise be? Spend time and money building a franchise system. It launches it and maybe even attracts two or three franchisees aboard your network. It’s all so exciting.
As time goes on, you realize you’re not making as much money as you expected. The first two or three franchise sales were easy, but no one queues to buy the next location. And now you’re spending a lot of money. Leverage the succulent profits of your corporate stores to fund your fledgling franchise business. Your spouse asks (because we all ask ourselves that question at some point), isn’t the franchise supposed to make us more money?
Related: Answer to the million dollar franchise question:
Franchising is a whole new business
Franchising is a massive learning curve. You thought you were dominating your original business and you were ready for the franchise. But now you realize that franchising is a completely different business. Turns out selling a $ 150,000 franchise is nothing like selling a pizza or the lawn mowing service you got it right.
You have to start over and learn a whole new business.
That’s why so many new franchisors are struggling to grow beyond the ten units – they don’t realize they now have two separate businesses. It was hard enough to run a business, but now they have two, and that’s hard. Like Jim Collins, author of the 2001 book Good to great: why some companies make the leap and others don’t so eloquently he said, “Two mediocrities never make a great enterprise.” If you are not careful, this is what will happen: you will end up with a mediocre corporate business and a mediocre franchise business.
So how do you escape this trap? You have to become a fast and demanding learner. When I think of the most successful franchisors I know, there is one common factor. In the early stages of their main business franchise, everyone else learned. We all woke up and realized we knew nothing about the franchise and that we should be expert and fast.
I’m writing this series because I’ve been there and I’ve done it. And I am deeply passionate about franchising as a business model and seeing that franchisors are successful in their search for scale.
I hope that reading this series of articles will help you accelerate your own learning to offer you and your franchise the best chance of success.
Related: Do you want to be the next subway? Avoid these costly franchisor mistakes