Franchising, licensing and intellectual property lawyer Tony Wilson shares some thoughts on the subject in an online report, “Why So Many Franchises Fail,” at TheGlobeandMail.com.
Just as we happily share our vast point of sale experience and expertise with startup owners in order to help them make the best decisions from the very beginning, we at Sintel Systems are happy to share articles and commentary about the perceptions and reality of the risks involved in making this career change.
Here are the highlights of Wilson’s insightful article, based upon his more than 26 years in practicing franchise law:
Although franchises fail for a variety of reasons, the most common reason is because the franchisee is undercapitalized. “Accordingly, if you’re interested in acquiring a franchised business, don’t go into it on a shoestring budget,” Wilson writes. “You won’t be able to deal with the inevitable ‘downs’ that come with the potential ‘ups’ – if and when those ‘ups’ happen.”
The second reason, according to Wilson, has to do with location. “If the location for the franchised business is on the wrong side of the street (no left turns permitted!) or the wrong end of the mall, it will have disastrous consequences for the business,” says Wilson. He notes that there are consultants who can help a franchisee with a location analysis to avoid these sorts of problems. “Likewise, if the ideal location is on the nicest street or in the fanciest mall, but the rent for that location is stratospheric in relation to the cost of the products being sold, the business will flounder and die.”
Wilson lists other reasons why franchised businesses fail:
• The public doesn’t accept the product or service;
• The marketplace may be too competitive;
• The franchisee may find they are not prepared to put in the hours and sweat needed to make a franchise successful;
• The franchisor may be undercapitalized because it is just starting out itself, or frankly, it’s being run by people who don’t know what they’re doing.
Fortunately, Wilson also has advice on what a prospective franchisee can do to avoid failing:
• Investigate the opportunity and perform their due diligence, even if it requires hiring accountants, business consultants or location consultants;
• Consult with a lawyer to review the franchise agreement and disclosure document and understand what the franchisor can do under the contract if you don’t perform;
• Remain critical and analytical regarding what a franchisor tells you. As part of your due diligence, speak to as many existing and former franchisees of the system as possible to get a comfort level with the business and the franchisor. Ask three questions:
– Are you happy with your decision to acquire this franchise?
– Are you making any money?
– Would you do it again?
Read the full TheGlobeandMail.com post here.
Sintel’s point of sale systems can help franchises mitigate these risks by lowering operational costs, providing sales analytics to distinguish what’s hot and what’s not and delivering transparency into inventory hold times.
Before you make your franchise move, consider calling Sintel Systems for a free phone consultation to help weigh and understand your point of sale options. We serve as a franchise incubator for clients across the retail, restaurant and service industries, forming lasting partnerships with our clients that you simply can’t get from a reseller.
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