Franchisors: How to Deal with Franchise Failure

Failure is painful for anyone to deal with but for franchisees, the failure of their business is more than just losing their investment; it's the loss of their livelihood too.

Many franchisees may have chosen to invest in a franchise rather than starting an independent business as they saw it as a ‘safe bet'. But starting any business is risky, and even the most successful franchises come with no guarantees.

As a franchisor, you must be prepared to deal with the situation if a franchisee fails. They may blame themselves, you, or even your franchise system but you must use it as an opportunity to understand what when wrong and how to prevent it from happening again.

What are the causes of failure?

If you have one of the most successful franchises with many profitable franchisees, then the failure of one franchise is likely to be the fault of the franchisee. Inadequate or poor management of the operation are the main reasons why a franchise fails, but many reasons may have occurred even before the business was started.

If the franchisee selected the wrong location, didn’t have enough working capital or didn’t fully appreciate their responsibilities as detailed in the franchise agreement; then the business was doomed to failure before the doors even opened.

As much as the blame seems to lie with the franchisee in these cases, as the franchisor, you must also take some responsibility. You will have recruited the franchisee and trained them on how to follow your franchise system. You may not have chosen the site for their franchise, but you will have approved it.

So, take the negative of a franchisee failing and turn it into a positive. Use it as an opportunity to improve your franchise system to lower the chances of the same mistakes being made again.

Understand where things went wrong

But how do you assess why the franchisee failed? Here are some steps you can take to understand what the issues may have been:

• Review their recruitment file – Are there any warning signs in the franchisee's application which may explain the failure? Hindsight is a beautiful thing, but if you can use it to set criteria for future franchisees, then it will improve your hiring process.
• Look back at the franchisee’s performance – Were there any issues with performance which should have been spotted sooner? Did the franchisee get the support they needed? As well as the franchisee asking for help when they need it, it's also vital that you monitor performance so that you can step in proactively if there's a problem.
• Always conduct an exit interview – As hard as it may be the listen to the feedback of a franchisee that has failed, it’s necessary for you to understand their perspective. You may struggle to get to the root cause of why the franchisee failed without hearing things from their viewpoint. You may want to consult with your solicitor before you hold the interview in case they have any words of advice.
• Discuss your findings with other franchisees – This may not seem the most obvious of actions to take but how you deal with a failed franchisee will reflect on your ability as a franchisor. Your other franchisees will want to take comfort from the fact that you have fully assessed the reasons for the failure and you’re putting steps in place to stop this happening again. They may also offer some suggestions for how the business model can be improved which is valuable insight you should take on board.
• Brief your management and support team – Once all the analysis has been collated, you must share your learnings with your senior team. Be honest. If the franchisee felt that the support team didn't do enough, then tell them. By taking ownership and responsibility of the failure, you can stop it from happening again. By avoiding the issue, you risk a repeat performance.
• Put any necessary changes in place – You should regularly track your franchisees’ performance so that you can spot any problems. If this level of monitoring isn’t in place, then you need to make some changes. Only by checking that the franchisee is earning enough to take a wage themselves can you be sure that the franchise is performing sufficiently. You have a duty under the franchise agreement to support your franchisees, and you should take this obligation seriously.

What you can learn from your franchisee’s failure

Thankfully the franchise failure is extremely low. According to the British Franchise Association / NatWest Franchise Survey 2015, less than 4% of franchise business fail each year. Combine this with the 97% that report profitability and the chances of the most successful franchises experiencing failure is low.

But of course, no franchise is immune, and even if you're the franchisor with the most profitable franchisees, you need to understand what you should do if one ever does succumb to failure.

Perhaps the most important lesson to be learnt is that franchisees that do fail should be treated with respect. You should take any feedback they give you on the chin and support them as much as you can to exit the business as smoothly as possible. How you deal with the exiting franchisee will play a big part in how your other franchisees view you.

In most cases, you should be able to deal with the situation effectively and gain in the long-term from the experience. Not only does it give you the opportunity to improve your franchise system if necessary but can also help to build an even stronger relationship with your other franchisees.

In turn, this will have a positive impact on your recruitment process as they will speak positively about you as a franchisor to prospective franchisees. This will ultimately help you to recruit a good quality franchisee which will also lessen the risk of failure happening again.