Top 10 Franchise Failures And How To Avoid Them

Franchising can help you enter the business world and be greatly beneficial;

however, it’s not guaranteed to be successful. 

At the end of the day, many businesses fail in their first year; franchises are much the same. Yet, there are some common failures that you can avoid to lessen this chance. 

1) Failing to Adapt to Market Changes

When you buy a franchise, you expect to purchase a tried-and-tested system. However, markets change. 

Just look at the last few years with AI. If you told anyone about AI in the early 2000s, they would have laughed at you, maybe even thought you were crazy. Now, though, just over a third of people in the UK have used it. 

This is just one example as well. If you go back a little further, we can look at the downfall of Blockbuster, which, if you’re Gen Z or older, you probably remember them. 

The company was a huge franchisor at its peak in 2004, with 9,000 franchised stores worldwide. You could pretty much rent DVDs from them, like films, documentaries, etc. They, however, failed to adapt when digital streaming services came out, resulting in bankruptcy in 2013. 

Remember, though, this wasn’t the fault of the franchisee. It was the fault of the franchisor. Therefore, you need to be very careful about who you franchise with, ensuring they’re constantly rolling with the latest trends. 

How to Avoid It 

• Choose an established brand that invests in innovation. 
• Guarantee the franchisor has a history of evolving with market trends. 
• Work with business owners willing to listen to their franchisees about modern business practices.

2) Poor Financial Management

Whether an independent business or a franchise, managing your finances needs to be a priority. At the end of the day, you need to know what’s going out and in and how much you’re profiting. 

Therefore, before franchising in the UK, run the numbers and check all the low and high costs. Calculate everything from start-up costs to operational expenses, unexpected fees, royalty payments, marketing fees, working capital, and more. 

Not only this, but do a financial audit on the franchisor. BHS, for example, was a huge international franchise, and it collapsed in 2016 due to financial mismanagement, mounting debt, and a lack of reinvestment, resulting in 163 stores closing. 

How to Avoid It 

• Develop a business plan that includes all franchise costs. 
• Maintain a financial cushion to handle unforeseen circumstances. 
• Perform a financial audit on the franchisor or get a financial advisor to do it before investing. 

3) Choosing the Wrong Location

A poor location could lead to poor customer traffic, competition saturation, and high rent costs. 

When purchasing a franchise and a location, think about these factors. Don’t only look at affordability, look at other factors that’ll actually drive sales. 

Krispy Kreme, for example, is struggling with expansion in the UK. Currently, they’re non-profitable in the UK, and this could be due to them targeting small stores. 

These stores may be affordable for them as a franchisor and the store as a franchise. However, the traffic and purchase intent might not always be there. 

How to Avoid It 

• Conduct market research before selecting a site. 
• Research competitors in the area and their success. 
• Seek guidance from a franchisor on location selection.

4) Inadequate Training and Support

Every successful business requires training and support, regardless of industry or type. Without it, franchisees will struggle to maintain consistency and operational efficiency. 

Therefore, before making the initial investment, consult with the franchisor about their training and support protocols. Ideally, you want a hands-on approach until you’re set up and running smoothly, as well as ongoing support or updated training. 

Because, in reality, the franchisor knows everything about the brand, their system, what works and doesn’t, plus a hundred million other things, so their knowledge will be invaluable. 

How to Avoid It 

• Choose a franchisor that offers consistent training and support. 
• Take full advantage of all the learning resources given to you. 
• Network with other franchisees to share best practices and learn from each other's mistakes. 

5) Underestimating Costs

If it’s your first time entering the world of being a franchisee, then you need to be extremely careful NOT to underestimate costs. 

Ideally, you should have a complete understanding of costs regarding the following areas: 

• Franchise Fee
• Real Estate & Leasehold Improvements
• Equipment & Inventory
• Business Licenses & Permits
• Professional Fees
• Grand Opening Marketing
• Ongoing Royalties
• Marketing Fees
• Rent & Utilities
• Payroll & Employee Benefits
• Insurance
• Technology & Software Fees
• Miscellaneous Expenses

Failing to understand these costs might result in costs much higher than you once thought, which, honestly, can range from a few thousand to hundreds of thousands. 

For example, with a franchisor like Esquires Coffee, they recommend an investment of around £270,000 to £300,000 for its franchisees. 

How to Avoid It 

• Budget for all costs and be very precise. 
• Ensure you have at least 6 to 12 months of working capital. 
• Review financial projects with a consultant before investing.

6) Franchisor-Franchisee Conflicts

Disputes between a franchisor and a franchisee can appear out of nowhere. It could be to do with royalty payment, territory rights, or even operational control. 

More often than not, these conflicts occur due to poor communication through the purchasing and operating journey, sometimes leading to legal disputes or terminations. 

Not only this, but conflict between the franchisor and other companies can also happen. The most notable example of this is probably the Burger King franchisees in Australia having to change their name to Hungry Jack’s as someone already trademarked the name Burger King. 

How to Avoid It 

• Carefully review the franchise agreement before signing. 
• Seek legal advice to understand obligations. 
• Maintain professional communication with the franchisor. 

7) Lack of Local Marketing Efforts

More often than not, franchisees rely heavily on the established brand they’re investing in. After all, that’s why they want to be a franchisee. 

Though great, a lot of the time, these established brands will only perform national marketing campaigns, such as brand awareness campaigns, aiming to boost the interest of all franchises. 

For local services, however, the return on national campaigns might not be as valuable. Some shops and even services need local marketing to really thrive. 

How to Avoid It 

• Develop a business plan that includes local marketing (if required). 
• Understand whether the franchise has a local marketing package. 
• Participate in local events (if possible) to build brand awareness. 

8) Overexpansion

Perhaps the franchisor has seen a bit of success, and all of a sudden, they 100x everything in hopes of bringing in even more revenue. 

On paper, it sounds great. “If ‘x’ shops provide us with ‘x’ revenue, then ‘x’ more shops will provide us with ‘x’”. However, there’s always a limit. Reaching the limit, though, is just a matter of when. 

Dunkin’ Donuts’ has experienced this a few times before. They’re very popular in the US. However, in 1965, they opened 250 UK stores, only to close them all by 1968. Again, the same situation happened between 1998 and 1999 with over 100 outlets. 

What they discovered is, well, Brits don’t really like doughnuts as breakfast or snacks, so during this time, they couldn’t expand in the UK. 

How to Avoid It 

• Work with a franchisor that prioritises strategic expansion. 
• Be careful about franchising with oversaturated franchises. 
• Ensure the franchisor grants some type of exclusive territory or radius-based restrictions. 

9) Ignoring Customer Preferences

This almost carries on from the first failure we mentioned regarding market trends. As in reality, customer preferences are like market trends, they change and adapt as time goes on. If a franchiser or a franchisee fails to adapt to these changes, failure will happen eventually. 

How to Avoid It 

• Work with franchisors that focus on modernisation and service improvements. 
• Have communication with a franchise manager where you can discuss customer feedback. 
• Buy a franchise that’s properly managed and ensure that your voice is heard. 

10) Expecting Immediate Success

As a first-time franchise, it’s easy to expect immediate results. You see big-name franchisors in the high street that have a constant flow of customers, so why shouldn’t yours? 

Well, over time, they’ve built up that customer trust and engagement, regardless of the brand. And like any successful business, it’ll take time to get to this point. 

Plus, if it’s your first time, you shouldn’t want to go zero to a hundred right away. It’s new. You’ll want to learn the processes and systems gradually so that when it’s busier, you and your team are prepared and knowledgeable. 

How to Avoid It 

• Set realistic expectations about growth. 
• Understand that a successful business takes time to establish. 
• Continually assess business performance and adjust if needed. 

At ActionCOACH, we believe that franchising is a superb way to become a business owner, but success isn’t always guaranteed. 

By understanding these common failure points, it ensures that before and when you buy a franchise, you’re already one step ahead.

This allows you to make more informed decisions regarding who you work with and where, allowing you to increase your chances of success. Speak with one of our advisors to see how we can help you become a successful business owner.