Top Reasons Franchised Businesses Fail

This is a guest post from Upper Midwest Franchising


The #1 reason people buy into a franchised business is related to risk. Franchises are essentially replications of businesses that have been successful somewhere else, leaving the owner with the task of operating instead of inventing. While it is true that the failure rate of a franchised business is much lower than a start-your-own businesses, these business can and sometimes do fail. Terse McGroarty, a FranNet colleague of mine Northern Ohio, did a great job describing the top 10 reasons why franchisees fail in a recent 1851 article. I’ll provide some guidance commentary on Teresa’s top 3.

Insufficient Cash Flow

This is a common failure for all types of businesses. Franchised businesses are regulated by a Franchise Disclosure Document (FDD). Item 7 of that document describe the required startup costs and typical working capital for your franchised business. FranNet consultants help you understand these costs and work with you to add margin where you you and the franchisor feel is appropriate.

Franchisees don’t follow the franchise model

When you start a franchised business, you should go into it with the intention of following the franchisor’s operating instructions. Those instructions are an important part of lower risk component to franchised businesses. Different franchised businesses require different amount of structure. FranNet’s assessment helps you understand how much structure you want in a business and helps match you with a concept based on the assessment’s compliance measurement.

Underspend on local marketing

A common question from clients is ‘What does the franchisor do to find me business?’. While this is an important part of deciding which business you chose, almost all franchisors will stress the importance of local marketing and networking when during launch. The FDD Item 7 will provide a cost estimate for the local marketing. The local marketing cost estimate is an estimate based on what other business owners have needed to get their respective businesses off the ground. Underspending on this during your launch is essentially ignoring a lesson learned that the franchisor is sharing with you. A better approach is to plan to spend as the franchisor thinks is necessary and adjust/customize AFTER you learn what marketing is working best for you.

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