Cause of franchise deaths: usually 1,000 cash cuts

Death1000cutsThe cause of a franchise death is often viewed too simplistically.

There is very seldom one reason for a small business failure.

With franchising, the complexity and lack of control results in a fundamentally higher level of business risk (see section, The Marriage of Franchising).

After having read hundreds of news articles, talked and interviewed nearly as many franchisees, you come to appreciate that a single franchise failure has certain similar elements but very many very common issues.

A new franchisee’s cash position is quickly weakened by hidden profit “bleeds” (high margins on supply, leases, equipment, leaseholds and tied/forced buying, contracting, etc.) that were not expected or budgeted for.

Sales don’t show up nearly as quickly or inexpensively as was planned on.

Reserves quickly dwindle, leaving the organism of your franchise vulnerable to a “fatal” adverse business incident. This culminating incident might be what you see as your franchisor’s bright idea, such as Tim Hortons’ frozen food centralized commissary decision. The extra 3 or 4% on COGS is too much for some marginal stores: Most simply slip away, largely unnoticed.

Some decide to fight with a $2-billion lawsuit against a Canadian “blue chip” system.

  • The latest cut (which has asymmetrical payoffs: ee v. or) is simply the straw that broke the camel’s back.

The franchisors’ means for extracting wealth from franchisees (acting opportunistically: self-interest with deceit) are so many that many smart investors have concluded that business franchising is unsafe at any brand.

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