Most Franchisors Fail to Scale Because They Don't Realize This Franchising is a massive learning curve and a completely different business that needs to be mastered.
By John DeHart Edited by Russell Sicklick
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Franchising is having a moment. During the economic disruption caused by the pandemic, the franchise business model has proven 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 seeing a massive spike in new franchise systems.
But there is a problem: too many franchisors never grow into a bona fide successful franchise system. The numbers don't lie: 67 percent of all franchisors who 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 ever grow past 100 units. We don't have a startup problem in franchising, we have a scale-up problem.
Here at my company, we are driven to understand why the franchise success rate is so low, and to improve it. Starting new franchise businesses is a big part of what we do. We have launched and grown our brands into hundreds of units. We also analyze dozens of new startups each year, choosing a group of 10 promising companies annually to help launch into the franchise universe.
Related: 6 Lessons Learned from Franchisors Who Launched in 2020
I created a thriving business. How different can franchising be?
Over the next few articles in this series, I will describe the major challenges franchisors face at the startup stage. But I want to begin by sharing the root cause of the multiple issues that hamper the launch of new franchisors. Let me walk you through the classic startup:
You are highly successful in your local business and have spent years building a great name in your community. You have expertise in your space, and locals come to you for it. As Malcolm Gladwell wrote in his 2008 bestseller, Outliers: The Story of Success, you have put in your "10,000 hours" to get to where you are. Most likely you are experiencing success and making good money. Friends and customers keep saying, you should franchise this or asking when are you going to franchise.
Related: Considering franchise ownership? Get started now and take this quiz to find your personalized list of franchises that match your lifestyle, interests and budget.
One day you decide to go for it. Your thinking is, I'm great at this business, how different could franchising be? You spend time and money to build a franchise system. You launch it and perhaps you even attract two or three franchisees on board from your network. It is all so exciting.
As time goes on, you realize you aren't making as much money as you had hoped. The first two or three franchise sales were easy, but no one is lining up to buy the next location. And you are now spending a lot of money. Taking the juicy profits from your corporate stores to fund your fledgling franchise business. Your spouse asks (because we all get this question at some point), wasn't franchising supposed to make us more money?
Related: Answering the Million Dollar Franchise Question:
Franchising is an entirely new business
Franchising is a massive learning curve. You thought you had mastered your original business and were ready to franchise. But you now realize that franchising is a completely different business. It turns out that selling a $150,000 franchise is not at all like selling a pizza or the lawn mowing service that you have absolutely nailed.
You have to start all over again and learn a totally new business.
This is why so many new franchisors struggle to grow past ten units: they don't realize that they are now running two separate businesses. It was hard enough running one business, but now they have two, and that is hard. As Jim Collins, author of the 2001 book Good to Great: Why Some Companies Make the Leap and Others Don't so eloquently said: "Two mediocrities never make one great company." If you are not careful, that's 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 must become a fast and fastidious learner. When I think of the most successful franchisors I know, there's one common factor. In the earliest stages of franchising their core business, they out-learned everyone else. We all woke up and realized that we knew nothing about franchising and that we would need to become experts and fast.
I am writing this series because I have been there and done that. And I am deeply passionate about franchising as a business model and seeing franchisors succeed in their pursuit of scale.
I hope that reading this article series will help you accelerate your own learning to give you and your franchise the best chance of success.
Related: Want to be the next Subway? Avoid these costly franchisor mistakes
