How to Avoid Franchise Failure

How to Avoid Franchise Failure

By: Jack Findaro, Product Development Director at Visa Franchise

Foreword

Our focus at Visa Franchise is to help our clients find the best franchise business investment that will qualify them for an EB-5, L-1, or E-2 investor visa. We have researched over 800 franchises in order to find the best investment opportunities that match with the unique profiles of our clients and their families. While the process of finding the right franchise business investment is incredibly important, what is even more important is to ensure that the chosen business investment does not fail once it is opened. Not only would the immigrant investor lose their investment, but if they are dependent on the success of the business for their EB-5, L-1, or E-2 investor visa then they will need to make a new investment or risk being required to leave the U.S. until they find another visa solution. Our focus at Visa Franchise is to decrease the risk through continuous research and conversations with franchise businesses.

Main Reasons for Failure

Through our research and discussions with franchises, we have been able to discover the principle reasons why franchise businesses fail even after going through the entire in-depth process of investing in a franchise. While investing in a franchise business has many benefits, including an established business model within the U.S., some factors such as controlling fixed costs and operational management need to be addressed once the investment has been decided and the business opens. Failure to do so can result in the business having a much lower chance of success. The principle reasons for franchise failure will be covered in detail below.

Lease Agreement

One of the most important aspects for an individual to consider when investing in any business, not just a franchise business, is the lease agreement. The lease agreement is the agreement between the tenant and the landlord that sets all of the terms of the lease, including the monthly rent, number of years the lease is valid, tenant improvement, and rate abatement, among other important items (see here a glossary defining franchise terms). For these reasons many franchises that require a prime retail location will devote significant time and resources to ensuring a proper location is found and that the franchisee obtains a favorable lease. Leases typically last at least 10 years, which is why it is vital that the lease is properly negotiated. A major reason why many retail locations fail is due to the business having a high fixed rent, relative to revenue, that must be paid on a monthly basis regardless of the sales for the month. Once the rent surpasses a certain percentage of sales on a monthly basis, it can become nearly impossible for the business to be profitable. Many operational expenses can be controlled on a month to month basis, though rent is not one of them.

It is important to note that there are many types of service based franchises that do not have this problem. Service based businesses can routinely be managed from a satellite office, shared office space, or even an individual’s home at the beginning. This enables the investor to not have to worry about securing a lease that requires a multi-year commitment, thereby removing one of the principle reasons for why a business might fail.

Franchisor Knowledge and Advice

Another frequently cited reason for a franchise failing is due to the franchisee business owner not listening and following the franchisor’s advice. Through many conversations with franchises, a principle reason for franchisees failing and closing their businesses are due to the fact that they did not follow the business model. The franchisor provides guidance on every single facet of the business, including marketing, hiring, training, pricing, and purchasing, among others. The purpose for investing in a franchise is to gain the right to use a proven business model as well as the full support of the franchisor. If an investor is not willing to use the guidance and know-how of the franchisor, then what is the purpose of investing in a franchise? A major benefit of investing in a franchise is the access to the collective knowledge of the entire franchise system. This collective knowledge includes not only the franchisor’s knowledge but also the knowledge of all the other franchisees. Both the franchisor and franchisees are typically more than happy to provide guidance at any time. A franchisee should use this knowledge and not assume that they know better than everyone else, regardless of prior experience they might have in the specific industry.

Active Engagement with the Business

While a franchise with its brand, processes, and proven business model can certainly increase the ease of operating the business compared to an independent business, this does not mean that a franchise can go on autopilot. The majority of franchises require the owner to be actively engaged in the business, starting from the development phase until at least over a year has passed and the business has had a chance to mature and stabilize. The owner’s involvement is especially important in the beginning as the business needs to make a reputation for itself in the community. Mistakes during this phase can lose customers and make it increasingly difficult to find new customers if the business has a bad reputation. On the other hand, if the business does an exceptional job providing needed services to its customers then it can grow significantly faster. Additionally, the processes, hiring, and training all need to be set in the beginning before bad habits become ingrained. For these reasons, an owner that is actively managing the business on a day-to-day business increases the chances of the business succeeding. Note there are exceptions to this rule, particularly for businesses that have a full-time manager or joint venture businesses where the investor invests alongside an operator that will handle the day-to-day operations of the business.

Flawed Business Model

A major reason why franchises fail is due to a flawed business model, though many failed franchisors will be reluctant to admit this. The most successful businesses constantly innovate and adapt to the changing economy. This is especially important in the U.S. where the economy is the most dynamic and competitive in the world. Franchises, as well as businesses in general, that do not adapt to changing regulations, costs, and consumer tastes and preferences, inevitably fail. This would be the worst case scenario for any investor or business owner, especially one who is reliant on the business to succeed in order to retain their EB-5, L-1, or E-2 investor visa. Some recent examples of failed franchises include Quiznos (flawed cost structure and business model), Reg Mango (changing consumer tastes and market oversaturation), and Blockbuster (changing competitive landscape), to name a few. Such as Subway might not have technically failed yet but are certainly on their way due to a flawed business model. In Subway’s case it is mainly due to changing consumer tastes and oversaturation in the U.S. market. It should be clear that regardless of how long a franchise business has been around, no business is immune from the forces of the market. For that reason, we are always on the lookout for investments that are new, differentiated, and at the forefront of the market.

Lack of Proper Due Diligence

The final major reason why franchise owners fail is due to lack of proper due diligence before deciding to invest in the franchise. An investor needs to know what they are getting themselves into before deciding to invest in a business. For that reason, we at Visa Franchise work closely with our clients and provide many resource guides that they can access as they go through the investigation phase. Additionally, we have created lists for the key questions to ask the franchisor  and key questions to ask franchisees that should be used as references during the conversations with the franchisor and franchisees. The franchisor will go into detail regarding the business model and support that they provide to their franchisees. The franchisees are great resources of information as they are typically very transparent with potential franchise investors regarding the financials of the business as well as what they like and, more importantly, do not like about the franchise. We strongly recommend our clients take the time to gain as much information as possible before deciding on their investment.

How to Avoid Failure

Clearly there are multiple ways that any investment, not just franchise investments, can fail. Fortunately, each one of the main reasons as to why franchises fail can be easily avoided. Our hope is that knowing the principle reasons why franchises fail can help a potential franchise owner avoid those pitfalls. Having proper guidance throughout the process certainly helps mitigate the chances for making a poor investment. Our sole focus at Visa Franchise is working with our clients to ensure that they find the best investment that will qualify them for an EB-5, L-1, or E-2 investor visa. Our continual research into franchise businesses helps us to stay up to date on the latest trends in the franchise industry, allowing us to better assist our clients in finding their ideal franchise investment.

About the Author:

Jack Findaro is the Product Development Director at Visa Franchise. He and his team focus on the research, analysis, due diligence, and ongoing relationships for the different franchises and businesses in Visa Franchise’s portfolio. Before Visa Franchise, Jack worked at Miami-based global franchise company Restaurant Brands International, parent company of global iconic brands such as Burger King, Tim Hortons, and Popeyes. He worked within various departments, including Global Finance, Investor Relations, and Global Development. His experience at Restaurant Brands International has enabled Visa Franchise to provide deep insights to their foreign national clients, many of whom are interested in investing in a franchise in order to obtain their investor visa for themselves and their family.

Who Is Visa Franchise?

Visa Franchise guides investors in identifying and analyzing the best investment opportunities tailored to their specific objectives. The focus of the firm is on franchises that qualify for the E-2 (1) and EB-5 visas (2). Visa Franchise is the trusted advisor of clients from all over the world when it comes to helping them find the business opportunity that best meets their investment and immigration goals. Visa Franchise takes into consideration their capability, experience, and size of investment to ensure that they choose the best possible option for their unique, individual situation. Visa Franchise is based in Miami, Florida with offices throughout the U.S. and world.

If you are interested in owning a franchise please reach out to info@visafranchise.com or call us at +1-888-550-7556

Note: Visa Franchise Does Not Make Any Financial Performance Representations Other Than Provided By Franchisors. It Is Always  Advised To Consult  With A Licensed Immigration Attorney Regarding Immigration Manners.
(1) E-2 Treaty Investor Visa Allows A National Of A “Treaty Country” – A Country With Which The U.S. Maintains A Treaty Of Commerce And Navigation – To Reside In The U.S. When Investing A Substantial Amount Of Capital In A U.S. Business (Generally >$150,000)
(2) EB-5 Visa Requires At Least A $500,000 Investment In A U.S. Business That Creates At Least Ten (10) Jobs For U.S. Citizens Or Green Card Holders In The First Two (2) Years. Investors May Either Start Their Own Businesses As Active Investors Or Invest In Designated Regional Centers As Passive Investors