Franchisors Should Beware of Marginally Financially Qualified Franchise Candidates

Before retirement, I was the founder of a franchising company. I like to think of myself as successful, and I often considered myself one of the most knowledgeable franchisors, but that’s not really saying much because there are only about 2000 – 3000 active franchisors in the country at any one time. That’s because franchisors have a failure rate in the first five years; a 5:1 ratio. That is to say all the new startup franchisors that you see in the franchising directories, only one in five will still be expanding their franchise operations after five years.

Interestingly enough, the failure rate for franchisees is the opposite figure 5:1 and therefore it’s better to be a franchisee than a franchisor from a risk reward, failure standpoint. Most people don’t know that. Now then, even though I had successfully expanded my company through franchising, I made so many mistakes along the way, it’s almost embarrassing to talk about it. But it wouldn’t be right if I didn’t warn other startup franchisors of the pitfalls, as maybe I can reduce that ratio, and save other franchisors a lot of money.

Over the ten-year period that I was franchising before I sold my company I had often, especially during recessionary periods, allowed franchisees who could barely qualify financially to squeak by and join our franchise system. It was a mistake to do this, but I had a soft heart and I wanted to help people with their American dream. The reason it was a mistake is that when you allow someone to join your franchise system who can barely qualify financially, if one little thing goes wrong they could easily run out of money, not have enough capital to expand, and therefore hurt your brand name, and even go bankrupt.

Obviously, the number one failure for small business, and franchisees included is lack of investment capital. If someone squeaks by, and barely gets their business started, and has no money to move forward, they can’t advertise, market, or expand their business even as they get new clientele because they get behind the cash flow curve. Franchisors therefore should be very careful not to allow marginally financially qualified franchise candidates to buy into their system.

That lesson came pretty hard to me, as I watched a few franchisees fail. I then realized I wasn’t doing them any favors allowing them to get into the system, if they couldn’t afford it in the first place. I think if you put in that perspective, and consider that argument you will better understand. Indeed I hope you will please consider all this and think on it.

Lance Winslow is a retired Founder of a Nationwide Franchise Chain, and now runs the Online Think Tank. Lance Winslow believes writing 24,000 articles by July 24, 2011 is going to be difficult because all the letters on his keyboard are now worn off now..