Why do some franchise owners go out of business? And why does it seem to happen (a lot) within the first year or two?
Warning: The answers aren’t complicated. I promise you won’t need to pull up Excel and create spreadsheets.
Top Two Reasons Franchisees Go Under
1. They run out of money.
2. They failed to do the proper research.
Starting with #1…
You may not know this, but one of the best things about buying a franchise is the fact that the franchisors tell you (in writing) what your total upfront investment is going to be. There’s no guessing. Heck, there’s even a line in the documents you receive mentioning “working capital.”
About Working Capital
In short, you need to have enough positive working capital to ensure that your franchise business is able to continue its operations and that it has sufficient funds to satisfy short-term debt and upcoming operational expenses. Except you’ll need more.
Case in point: the pandemic.
Looking back, if you owned a franchise during the past several months or so, unless you happened to have a working crystal ball within reach, you had no way to predict a pandemic and its devastating effect on the economy.
Now, obviously, a pandemic is an extreme example, but there aren’t many businesses that have enough working capital on hand to make it through a pandemic.
The good news?
A lot of franchisors have found ways to help franchisees innovate-and they’ve made it through the pandemic economy because of it. Here’s one.
Always plan for something unexpected that could affect your franchise business.
A gentle tip from The Franchise King®:
Do not buy a franchise until you know EXACTLY how to do thorough research.
Learn how here
The way to do that is to have more money in the bank than you need.
In other words, when you start a franchise, make sure you set aside more working capital than you think you’ll need.
One way to do it is to open a separate checking/savings account at your local bank.
Trust me, you’ll breath easier knowing you have extra cash available for your business.
Of course it wouldn’t hurt to have one of these, too.
Do it! You’ll thank me later.
The #2 Reason Franchisees Go Out Of Business
This one may surprise you.
The second reason franchisees go out of business has to do with what they did (or didn’t do) well before they bought the franchise. What am I referring to?
Extraordinary, fact-filled, pretty-near exhaustive franchise research.
Which happens to be easier to do than you think.
Heck, just calling and asking questions of a dozen or so existing franchisees of the franchise opportunity you’re considering can help lower your risk. Unfortunately, a lot of people who call me to help them “get out of their franchise” didn’t do it.
But talking to (and visiting) franchisees is only part of the franchise research process. There are several other things you need to do.
But if you’ve never researched franchise opportunities, how are you supposed to know how to do it?
Everything you need to know, all the steps you need to take, plus specific research techniques-including never before revealed ways to use the internet to find hidden franchise information, are included in my franchise research guide.
So you don’t end up with a franchise business you have to close down.