Problems Faced by New Franchisors

By Brian Duckett, MD of Howarth Franchising

The biggest problem faced by new franchisors is that they have often under-estimated the funding they require to develop their franchise, and they run out of money. This is usually because they are over-optimistic about how many franchisees they will recruit in the early years, and they are not aware of the costs incurred in franchisee marketing, recruitment and support. Franchisors whose franchisees require retail property to operate from will be lucky to recruit three a year, those whose franchisees work from home may manage five in the first year and ten a year thereafter, but no more.

There are two main reasons for this - the first being that franchisees typically want to join an established network and are therefore less keen to take a chance on a start-up. The other reason is the low number of people actually wanting to become franchisees - each year in the UK about 3,000 people buy a franchise, but at least one-third of these are re-sales of existing units. That leaves 2,000 new franchisees to be spread across about 800 franchisors - and average of 2.5 each. Obviously some networks are not actively recruiting, so that leaves more for the ones that are, but it is still not many per network.

Most franchisors will spend at least £30,000 on development and marketing costs before recruiting their first franchisee but they may have a maximum cash flow deficit, as the business grows, in excess of £100,000. Those that have not taken the right professional advice before launching their franchise will not know this and they will run out of money before they achieve enough franchisees, paying enough ongoing fees, to sustain the support structure that is required to maintain a successful network.

Then what happens to their early franchisees?