Why Do Franchisors Fail?

Written by Mark Siebert of entrepreneur.com.

The recent announcements of the bankruptcies of Bennigan's and Mrs. Field's Cookies raises a question that perhaps too few franchisors ask themselves in earnest: Why do franchisors fail?

These are not the first franchisors to declare bankruptcy, nor will they be the last. Some others include: 7-Eleven, Baker's Square, Boston Market, Ground Round, Burger Chef, and of course, a number of smaller franchisors whose names you might not recognize. Some have made a comeback, others have not.

So why do some franchisors fall upon hard times while others prosper?

To answer such an expansive question in such a short article requires some oversimplification. That said, here are my top three reasons for franchisor failure: concept, capital and management.

At the Core: The Concept

In franchising, it always starts with the concept. Some franchisors start franchising before they've properly refined the concept -- much to their own detriment, as well as the detriment of their franchisees, investors and bankers.

No concept is beyond failure. And franchisors have competing interests: They want to be sure their concept is fully refined, but they also want to be the first to market if they have a unique concept. At a minimum, the franchisor should remain confident that a properly trained and supported franchisee who follows the system will achieve a rate of return that's commensurate with his or her risk.

That said, it's important to recognize that markets change over time. Thus the relevance of a concept within a market could also change.

Bennigan's is a case in point. As consumers are affected by higher gas costs and the overall downturn in the economy, some have chosen to cut back on their food service budgets -- especially in the area of casual dining. A dinner that was once not given a second thought may now be viewed as a small luxury -- and an easy area for consumers to cut from their budgets.