Why do franchisees fail?
For the past 16 years I’ve run a property franchise business, and crucially, I’ve personally sold around 100 franchises.
Which means 100 people and their immediate family entrusted me with a big chunk of savings and a commitment to spend the next five years of their lives helping to build the brand I represented, for mutual enrichment.
Did they all succeed? No. My batting average was 5% fairly swift failures, 10% disappointing relationships and 85% achieving solid viability, ranging from OK to spectacularly good. Would they have been better to go it alone?
All the bank surveys ever conducted on business start-ups conclude that franchising wins hands down, compared to estimates in the range 50% to 90% of business start-ups failing within their first five years.
And of course this matters to the banks, who lend the money, which is why you will secure a bigger proportion of your overall business funding and more favourable terms if you apply to a bank to start a business through a recognised franchisor.
Recently, one of our subsidiary franchise businesses, Ewemove, has come under scrutiny for having an allegedly high proportion of franchisee failures.
What do we mean by failure and do we care?
It’s a sad fact that some franchisors do not care, because what interests them is taking a juicy franchise fee at the outset, allowing the business to develop somewhat, finding a reason to terminate the agreement and re-selling the territory to a new franchisee for another initial fee but now with the attraction of established business contacts.
Is this a good business model?
Short-term maybe, but long term utterly poisonous to a brand.
So let’s assume that failing is a bad outcome for both parties to a franchise agreement. Why does it happen?
What made my heart sink deepest in franchise suitability interviews were the words “My wife/husband/friend and I have always wanted to work together”.
Our failure rate in those cases shot up dramatically, and I can reel off the divorces and acrimonious splits which followed over the years. Business partners must bring different qualities to the venture, or when the going gets tough one will turn to the other and say “I don’t need you, I could do this by myself”.
I would tell prospective franchisees that the first two years in business would be like walking through death valley – it’s called managing expectations. When you are surviving on beans on toast every day a working partner who continues to bring in a salary is a godsend.
My second problem was the franchisee with plenty of cash. “You should take up golf” was my advice.
Our franchise was not entertainment, so if they were joining us then it had to be a serious and all-consuming undertaking. I remember a lovely successful man in Oxford who said “My daughter has recently graduated and I’ve got £150,000 to spend on a business for her, do you think you could help?”
That man then worked seven days a week for seven years and built a fabulous business from scratch, but he had both the money and the motivation to do so.
When Martin & Co started putting its franchisees into high street shops we did rather better than their predecessors in serviced offices and home-starts. At the time I attributed it to footfall, profile, client confidence that this was a business of substance.
But I think another fact was at play – fear. Fear of failure, fear of not being able to pay the rent, fear of having committed to a lease and not being able to walk away. Getting our franchisees into shops made the whole venture a lot more serious and ensured they turned up for work every day.
“A pulse and a wallet” are the two qualifying conditions for a franchise sale, as the old joke goes.
Ewemove operated the tightest scrutiny of its new franchisees that I’ve seen; interviews with the Head Shepherdess, a founder, and (very unusually) peer review by other franchisees. Recruits had to demonstrate a devotion to customer service, and this ethos rapidly established the brand as the UK’s No. 1 most trusted agent on Trust Pilot, where it remains to this day.
It’s a truism that a lack of working capital kills most start-ups.
The venture makes progress but it’s just not generating cash fast enough to cover overheads. Working capital is the cushion that pays the bills until the turning point is reached, typically around year two of trading. Ewemove made sure that its new franchisees had plenty of working capital but I think this contributed to the higher initial rate of franchisee failure, and here is why.
Lettings is a glider and sales is a helicopter. Put energy into a glider and it soars higher, ease off and you cruise on thermals. Stop putting energy into a helicopter and you plummet. If you have just borrowed £50k you have a healthy bank balance. In a few months with low overheads you might still have £45k.
The only mandatory cost of running a Ewemove franchise was the monthly licence fee of £1,000, pre-paid for the first 12-months trading because included in the initial £20,000 franchise fee. It’s easy to imagine new franchisees running the business as a relaxed lifestyle choice. Decide to get serious, and you are still six months away from banking completion fees.
I call it a duvet trap, comfortable franchisees avoiding reality, they needed tough love.
Tough love was administered by The Property Franchise Group. We enforced contractual terms in the franchise agreements and made it clear that this was not a lifestyle business.
The EweMove franchise had been spectacularly popular, surpassing 90 occupied territories by the time we bought in September 2016 from a launch in 2014, and winning unprecedented five-star reviews (“Best Franchise…..”).
However, its early adopters were in reality either soaring upward or falling out of the air. Nick Neil, the new managing director, a top performing sheep (the golden fleece!!) worked with the willing. Of the 2014 and 2015 franchise recruits, 42 have withdrawn from trading, in the vast majority of cases by giving the requisite six months’ notice to end their franchise.
Since 2016 the number of franchisees withdrawing is down to single figures per year and falling year-on-year.
What else have we noticed?
Professional estate agents who join the franchise are likely to outperform non-agents in their first two years trading. However, there is no difference in average performance after year two.
It’s why we are continuing to recruit non-agents with the relevant skill set which includes sales experience, drive and motivation, self-discipline and commercial acumen.
The EweMove franchise is a licence to print money for the right recruits, but as with all franchise opportunities the first test is to look hard and long in the mirror.
- Ian Wilson is chief executive of The Property Franchise Group