Why Franchisees Fail?
May 06, 2025
If you want real strategies, no fluff, to become a successful Multi-Unit Franchisee and leader, you are in the right place! The American Franchise Academy blog shares valuable insights and tips to achieve just that, even in not-so-popular topics like this one: the five reasons why franchises fail.
As I go through each reason, I will explain the roots of the problem and how you can rectify the situation if you find yourself falling into these common failures.
The best thing is that this information is not only for existing franchisees, but also for aspiring ones who are looking to get into franchising and want to learn everything they can to avoid failure.
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Reason #1: Choosing the Wrong Brand
There are over 3,000 franchise brands in the US to choose from. There's probably another thousand in Canada, about 2,000 in Mexico, 3,000 more in Brazil & South America. So, the options are very vast.
If you don't do enough due diligence and really do your homework to determine which is the best brand for you, you may end up choosing the wrong brand, which is the first reason why franchisees fail. However, I have to say that this doesn’t necessarily mean that it’s not a profitable brand.
Imagine finding this out once you are in the middle of running the business! You won’t truly enjoy whatever product or service you sell, nor the customers you attend to, nor the types of employees you spend time with, and more than likely, you will not have the passion and the commitment to do what it takes to make it successful.
To avoid choosing the wrong brand or the wrong franchise model, you have to do your due diligence and don’t just go for the trends. This means you must:
- Learn everything about the FDD (Franchise Disclosure Document).
- Carefully study the franchise agreement.
- Talk to the existing franchises to learn what their experience has been like.
- Do all the work you need to do to ensure that the brand is a good one and its financial model is healthy.
You should also consider questions such as the following to determine if the brand is one that you are most passionate about:
- What do I want?
- What do I enjoy doing?
- Does this brand align with my personal values and lifestyle goals?
- What kind of customers do I want to interact with?
- What kind of employees do I want to have?
- Do I want to do this every day of my life?
It is true that if you grow into a multi-unit enterprise, you won't have to work in the business all the time. But it is going to be pretty intense work, especially at the beginning, so investing in a franchise brand that you love and feel passionate about will give you the motivation to do what it takes to make it successful.
Reason #2: Not Having Enough Capital
When you buy a franchise, the franchisor usually gives you a certain capital expectation, but you must know that this amount might be higher. Sadly, not many franchisees are aware of this, and they go bankrupt before reaching the break-even point or even knowing how to get there. That's why the lack of capital is the second reason why many franchises fail.
The capital you need to open a franchise goes beyond the franchise fee and the money to build and open the unit. You also need to pay the lease, make all the improvements the business needs, and acquire the equipment and all the product inventory that is needed.
You also need money to hire and train team members, as well as for all the marketing related to the grand opening. These expenses are typically outlined in the Franchise Disclosure Document (FDD) or the franchise agreement. However, the reality is that you will likely need more than that, depending on your market.
For example, if you're investing in a well-known brand, like McDonald's, Dairy Queen, Anytime Fitness, or Massage Envy, people will know exactly what you offer the moment you put a sign outside the business and it is more than likely that they will buy your product or service without much effort on your part.
But if you invest in an emerging franchise brand or a startup that nobody knows about, the amount of money, effort, and marketing you'll need to spread the word about who you are, what you do, what you offer, and entice them to try you will be significantly higher.
Getting to the business break-even point will therefore take longer.
To avoid this from being a failure factor, you must be aware that you’ll need capital not just to open but also to support the business, operationally and administratively, until it has enough revenue to hit that magical break-even number.
In case you missed it: Access to Capital with No Personal Guarantees
Reason #3: The Wrong Location
The third reason franchises sometimes fail is that they don’t pay enough attention to selecting their location. This is vital because once you’re open, you cannot change it, as franchise lease agreements typically last between 5 and 10 years.
Therefore, if you choose the wrong location, you will not only be stuck in a place that fails to generate enough revenue, but you will also be bound to a long-term lease from which you cannot escape.
- Having a great brand does not fix having the wrong location. And changing locations is a very costly expense that franchisees are usually not prepared to pay.
To prevent location from becoming a cause of failure, it is crucial to conduct thorough due diligence on the various store locations available before opening.
There’s a franchising principle (I'm sure you have heard of it): Location, location, location. It is so true because having the right visibility, the proper access, and the right amount of parking is critical to inviting customers to come to your unit.
- The more visibility, the less marketing investment you’ll need to ensure that people know you exist.
Having the correct location is also about what's inside your location. This implies having the proper square footage & layout, an adequate image, and all the intended services you require inside to have the business model of the franchise you're investing in.
Keep learning: Finding the Right Location: Six Elements to Win
Reason #4: Lacking Business Acumen
The fourth reason why franchises fail is that they do not have the business acumen and knowledge to run a small business.
Too many people become franchisees in their retirement phase, as a way to invest the hard-earned money and savings into a business, or to accomplish the American dream of business ownership through franchising. And I think those are great ideas!
However, you need to prepare yourself and have the proper business & leadership management knowledge and skills to be able to make that business profitable.
This means understanding not only how to read a profit and loss statement, but also how to interpret it to identify areas of opportunity and improvement within the business.
You also need to know how to control labor cost, ensuring you are being as efficient as possible with your labor investments and still provide a good customer experience.
And, if you are in the retail or food service industry, knowing how to manage the cost of goods is also going to be crucial. This implies knowing how to project sales, do a proper order, manage the product and its storage during delivery, protect the product from potential theft or waste, etc.
As you can see, there's a lot more to franchise management than having a good brand.
Reason #5: Not Being Good Leaders
The fifth reason why franchises fail is that they are not great leaders. When you are a franchisee, being a great leader is a critical skill and ability you must have because having strong leadership skills will allow you to find, retain, and inspire great people.
You need to be able to understand how to manage the people and what you have to do to become the type of leader that these employees are looking for. Only then will they give you their additional effort so that they can be great team members and help you have a productive, efficient, and happy, positive business culture.
If you want to grow, you must also learn how to develop great leaders. Yes: your organization will grow as much as your people grow. The better the people you have in your organization, the better your business will be. And that is what will determine whether you are successful or not.
These are the top five reasons why franchises fail. If you find that one or more of those areas are an opportunity for you, the good news is that now you can do something about it to try and fix the problem!
And, if you want to get into franchising, now you have a better idea of what could potentially go wrong and what you have to do to increase your chances of succeeding in the franchise world.
If you feel that you may not have what it takes to cover all of these areas, and you would like support or coaching on how to be an excellent, top-performing franchisee, I would like to invite you to explore our COMMAND Program.
This program is designed for franchises that are already multi-unit or want to grow into a multi-unit organization, so that you can implement the systems, processes, procedures, and policies that are required to thrive in a multi-unit organization.
Learn more about the COMMAND Program or register for our next free information webinar, where we’ll go over the benefits and features of this multi-unit ownership certification:
Reflections:
- How much due diligence have you done to make sure you have the ideal franchise brand for you?
- Have you considered all the money you need to invest when you buy a franchise?
- Do you truly understand your numbers—P&L, COGS, labor, cash flow...?
- How focused are you on operations instead of strategy and growth?
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