Why Do Most Emerging Franchisors Stagnate?

Growth stagnation is common in franchising today. Almost 42 percent of the nation’s 3,400+ franchisors have fewer than 10 units. Over 2,300 franchisees have less than 50 units, a staggering 68 percent of the franchise industry. These franchises are classified as “emerging” regardless of how old they are because they have not grown beyond that point. But, there are steps franchisors can take to ensure they don’t hit a wall.

First, it’s important to recognize the most prevalent reasons why franchise growth stalls.

Roots of Stagnation

Stagnation typically occurs for three reasons:

1. Unfit for Franchising ‑ Many emerging franchisors struggle because their business models, their systems or their personalities are not a good fit for franchising. Franchisees suffer as a result.

2. Poor Planning – Emerging franchisors were not well prepared and had no detailed plan. Building your operations manuals and systems and completing a franchise disclosure document (FDD) are only part of the battle. If you do not have a plan to build infrastructure, put in support mechanisms and plan for growth, then you will not be successful in franchising.

3. Not Enough Capital – Often, emerging franchisors budget enough to get their systems in place, create manuals and develop their FDD and franchise agreement. But, that is where their capital planning ends and usually where their capital dries up as well. Typically, they need at least twice the start-up amount they originally planned to truly be prepared to spend money where needed to attract franchisee candidates, to have funds allocated to grow their support as they grow their base, and to have enough rainy-day capital to get through the slow times—as their growth plans usually take twice as long as they budgeted. Consider it the Law of 2’s – it will take twice as much capital and take twice as long before you achieve your goals.

Fortunately, there are steps for turning around a franchise stuck in a no-growth streak. The remedies will require determination, discipline and putting your current franchisees first.

Tips to Turn Around

Patience and discipline are keys to overcoming stagnation caused by the reasons stated above. Focus on solving one problem at a time.

“Emerging franchisors sometimes lack structure, support and capital,” said Steve Murphy, president of franchising at Winmark Corporation and Winmark Franchise Partners™. “Yet they are already franchising and now find themselves in a tough position.”

Start with your franchisees’ profitability. When you solve that problem and ensure your franchisees are making money and getting an adequate return on their investment, you will find you are much closer to solving the rest of your problems.

“Selling more franchises when you have not solved the existing problems with your franchise system will only lead to more angry franchisees, continued poor validation from your franchise system and mounting misery for you,” Steve said.

Next, focus on capital. If you have a struggling franchise, show no profit and do not have a sound business model, it will be difficult to find a partner willing to part with their own capital to help. Getting your franchisees profitable not only increases their satisfaction level, it also increases your cash flow. Take care of problem #1, and problem #2 can begin to take care of itself. Access to capital or adding an equity partner becomes much easier when you can show them you are on the road to success.

Avoid Stagnation Pitfalls with the Right Consultant

A franchise consultant can help companies determine if they’re right and/or ready for franchising. Businesses and entrepreneurs typically do not want to get into franchising if it is not the right fit for them or their business model. Winmark Franchise Partners start any engagement with a franchise feasibility study and let potential franchisors know right away if moving forward makes sense for them.

The right consultant can also help emerging franchisors who may be struggling. Proper financial planning, realistic goals, and objectives at the beginning will help franchisors avoid stagnation pitfalls. A solid consulting partner can also help overcome existing obstacles and help with improving the business model, finding operational efficiencies to drive profit, and improving franchisee profitability levels.

Over the past 30 years, Winmark Franchise Partners has helped five of its brands achieve over $1 billion in system-wide sales and has a track record of success in starting, growing and managing successful franchisors. If your franchise has grown stagnant and needs help getting over the hump, Winmark Franchise Partners may be the right partner for you.

To learn more about how Winmark Franchise Partners can help get your franchise off the ground, contact us today!
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