Franchising failures costing business owners

18 February 2008


Impatience, not paying attention to details and hiring the wrong people are among the top reasons for franchising failures, says commercial law firm Thomson Playford.

In an industry that is worth $100 billion a year and still growing, many franchisors are still falling victim to avoidable mistakes.

Thomson Playford partner and franchise law specialist, Mr David Gaszner, said the vast majority of mistakes are made in the start-up phase and have the potential to kill off the business before it even gets off the ground.

“For many business owners, franchising is a highly successful business strategy to increase market penetration,” Mr Gaszner said.

“It enables a business to expand beyond state borders through a network of committed and suitably skilled franchisees.

“History shows that most successful franchise operations are built from an existing business with a proven cashflow and a solid customer base.

“Too many people make the mistake of trying to franchise nothing more than a business idea.

“While there are no hard and fast rules about when is the best time to franchise a business, a track record of successful trading and a strong ambition or vision to create a national business with multiple outlets is generally considered the starting point.”

As part of that vision, Mr Gaszner said the early employment of key executives with expertise in marketing, business and sales strategy could make the difference to the long term success of a franchised operation.

According to the Franchising Australia 2006 survey conducted by Griffith University for the Franchising Council of Australia, Australia had approximately 960 franchise systems in 2006, up from 850 in 2004 and 700 in 2002.

Mr Gaszner said that with a typical franchise development plan costing up to $200,000 and taking five to six months to implement, securing early stage capital was vital.

“A decision to franchise a business should not be taken lightly – it needs careful planning and, for most business operators, external advice on market strategy and legal requirements,” Mr Gaszner said.

The franchise development plan should include a marketing and branding strategy, comprehensive documentation on the successful running of the business, an audit process and an education program for new franchisees.

“Franchising is often described as a ‘commercial marriage’,” Mr Gaszner said.

“Franchisors must exercise considerable care when recruiting franchisees. Each franchisee is a representative of the entire system and its brand, not just their individual outlet.

“Training is essential and good reporting and communication processes are needed to ensure that franchisees adhere to the franchised system and that any potential problems are quickly identified.”

Mr Gaszner said many successful franchise operations retained company-owned stores to provide a pool of experienced managers who are able to provide trouble-shooting advice to newer franchisees.

“Successful businesses are ones that evolve over time and company-owned stores within a franchised operation can help the franchisor stay in touch with key aspects of the operation of a franchise and trends among the customer base.” he said.

“However, the place of the company-owned store within the franchise system needs to be rigorously and carefully managed” he added. “If they are perceived as preferred stores they can quickly generate ill-will between franchisee and franchisor and provide fertile ground for disputes.”

Mr Gaszner said it was critical that franchisors sought legal advice on restraint of trade and confidentiality issues to protect their investment in a highly competitive market. “The Franchising Australia 2006 survey recorded that about 1/3 of respondent franchisors had had a franchisee leave their system but continue to operate a similar business independently. Nearly 25% of those franchisors had – or were intending to – take legal action against the former franchisee”.

“Carefully drafted provisions are needed to protect the intellectual property of the franchise system and specific restraint of trade clauses are essential if former franchisees are to be prevented from unfairly competing with their franchisor,” Mr Gaszner said.

Top Ten Mistakes by Franchisors

1.    Attempting to franchise a business too quickly

2.    No driving ambition for national or international growth

3.    Poor quality franchise development plan

4.    Insufficient capital

5.    Failure to protect the franchise through restraint of trade and confidentiality contracts

6.    Not having well-developed processes and systems

7.    Recruiting franchisees with inappropriate skills or motivations

8.    Failure to employ key people early in the business’ growth

9.    Insufficient attention to branding and trademarks

10.  Lack of company-owned operations

Source: Thomson Playford