Everyday we all see many immature and mature brands getting into a franchise business without much study, preparations, infrastructure and work ethics. In last 10 years this system has become a craze and money making trend for every kind of businesses whether its a business empire worth 20 million or 20 billion.
Its food, clothing, healthcare, tourism or education, none of the markets escaped eyes of franchise systems. The speed by which its spreading , the same speed its failing too. exceptions of few successful systems do exist as exceptions are always there but studies and researches explains that there is a huge number of failures in the system. I myself went online for in depth study about franchise system's analysis and statistics based on real grounds. they are as follows:
" a financial theory which explains how best to organize relationships in which one party (the principal or franchisor) determines the work, which another party (the agent or franchisee) undertakes. Since the agent’s self-interest are in conflict with the principal’s self-interest, alignment of outcomes via contractual relationships is a key to mutual success."
"All that glitters isn’t gold in franchising. While franchising can be a successful means of expanding a distribution system its reliability in achieving success is certainly questionable. This is particularly true for emerging franchisors. In fact academic research has shown that as many as three-quarters of all new franchise systems cease franchising within 10 years of formation "
"characteristics of successful franchise systems:
1. New franchise systems which permit passive ownership of franchised outlets are more likely to fail
2. New franchise systems which require higher levels of franchisee cash involvement are less likely to fail
3. New franchise systems which require franchisees to have experience are less likely to fail
4. New franchise systems which are geographically concentrated are less likely to fail
5. New franchise systems which are more complex are more likely to fail
6. New franchise systems which employ master franchising are more likely to fail
7. New franchise systems which have higher levels of total investment are more likely to fail
The results of the study indicate that franchise systems founded between 1981 and 1983, which are structured to economize on agency costs, are more likely to survive than franchise systems which are not structured to economize on agency costs. This finding is important because the failure rate of franchise systems is high, with over 72 percent of the new franchise systems in the sample ceasing to franchise by 1995.
There are few simple reasons for franchisor failure:
1. Franchisors don’t treat the franchise relationship as an interdependent relationship where success at all levels in the organization is dependent on each party to the franchise agreement. Ignoring this fact causes franchisees to feel they’re treated like unappreciated employees, breaks down communications and ultimately fractions the system itself. This results in untimely royalty payments and focuses franchisor’s attention on collections and possible legal actions.
2. Too much of pressure and dictations suffocates the partner who feels trapped in a system where for a brand name his life becomes hell and thus to ventilate he or she goes to an extent of closing the business even at a cost of any kind of financial loss.
3. Franchisors, especially startups, whether out of necessity or overzealousness, use the practice of checkbook franchising. That’s the difference between selling a franchise and awarding a franchise. Just because a franchise candidate has the funds doesn’t mean he will be successful as a franchisee. Too many of these franchisees cause problems in all areas and affect the system as a whole resulting in closed units and legal problems. Both of which must be disclosed in disclosure documents that ultimately affects franchise sales.
In the end, franchisors experience reduced revenue streams in both royalties and franchise fees while increasing legal expenses. Once this cycle begins it’s extremely difficult to stop without drastic change.
