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Rapid expansion doesn't always mean success when it comes to franchise businesses

Written by: Jim Coen

Article Overview: Growing franchise businesses too fast is an easy to kill off a good concept.

Rapid expansion doesn't always mean success when it comes to franchise businesses

If growing the franchise quickly, trumps other goals, such as developing successful franchisees, tweaking operations, picking prime locations or building a solid customer base, company operations can turn bad in a hurry.

Growing franchise businesses too fast is an easy way to kill off a good concept.
Boston Market is a good example. The company, formerly Boston Chicken, grew from 20 stores in the late 1980s to more than 900 franchises by 1998.

The franchisor decided that building stand alone stores was the way it wanted to grow, the stand alone stores couldn't sell enough food to pay the bills and repay their loans.
The chain filed for Chapter 11 bankruptcy, bought back nearly all of the franchises and closed almost 200 stores in 1998, before getting eaten up by McDonald's in 2000.

The root of the problem was the company became so obsessed with growth that it overlooked principles of good business like grooming good franchisees and managers while building solid relations in the community.

If a franchisee is not making money at a single outlet, chances are pretty good that they are not going to make a lot of money at multiple locations.

It's not uncommon for franchise businesses to get overly ambitious in their franchising plans, especially since many franchisors are attracted to franchising because they want to grow faster than their own capital allows. Franchising allows businesses to use OPM (other peoples money) and therefore limit their risk but not necessarily the risk of the franchisees.

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Related Forum Posts
What are the signs it is time to expand? - I work with small businesses that are considering expansion. Sometimes they are not sure if expansion is the right thing for their business. What types of things should they be looking at to determine if the time is right to expand?
Re: What is the Best Franchise? - As a franchise owner the things that I look for in a prospective franchise is: 1- A proven track record. Too many franchises try and branch out long before they have perfected their product, don't become a guinea pig for them to figure out what works and what doesnt. 2- Support. A good franchise should have great communication with it's franchisee's and be available to meet it's franchisees needs. Youre only contact with them shouldn't be when you have a problem. Good franchises involves it's franchisees in building it's business. 3- A Great System. McDonald's doesn't exactly make a good hamburger but they have an excellent system of conducting business. The real value in a franchise is the system, not necessarily the product. There are many other factors in deciding on a franchise but many of those are personal to you and your situation. The best thing to do is to conduct as much research as possible and speak with every current franchisee you can and get a feel for the franchise. garyshouldis.com
Re: Franchising? Why pay franchise fees? - [quote:5ii0papt]Starting a franchise is like buying yourself a job and inheriting the "recipe for success". In addition, a good franchise in the proper location can translate into a license to print money... so why not?[/quote:5ii0papt] I tend to lean towards taking a more independent approach myself. This is because I like doing things my own way. There are plenty of success stories of small businesses that have dialed in there own concepts and marketed their business well... heck... that's how ALL franchisors are born. I see it as a toss-up really... relating to different personality types. Some investors don't want to think about building their own 'system', and would prefer to hit the ground running at whatever the expense - read franchise fees, royalties, etc.
Re: 40 cents per dollar is spent in a franchised business - Hey Ringo, You quoted this information: "The average initial franchise investment is $250,000" Here is your statement/question: "While I understand that you are paying for someone else's success in development, marketing and business model, with such a big upfront investment, why not make something of your own?" The part I would like to comment on is where you say "with such a big upfront investment". On an average initial franchise investment of $250k, the buyer is only fronting 20-30% of that. So their initial cash investment is actually only $50k to $75k. Although that is nothing to sneeze at, if you have a good system that you are buying into and you have the drive and ability to be a good business owner, statistically speaking you stand a higher chance of success with a proven franchise than an independent business. Of course we have all heard the numbers that are thrown around by various folks about what the increased success rates are, I don't know what they are exactly, only what I have been told by "others". I always always recommend performing the proper due diligence when reviewing franchises. From what I understand the increased expenses of owning a franchise are more than offset by the increased revenues & increased profit dollars at the end of the day. There might be a few businesses though that are not conducive to franchising, for example a web based business is hard to franchise because of competition and low cost of entry. I review independent businesses and franchises every day. The thing that stands out more often than not is that the independent businesses are not doing as well as the franchises overall. Remember though, I might be a bit biased because I am a franchise consultant, so for full disclosure, I make money when people buy franchises. I think with the proper due diligence most people will make the right decision. Reducing risk, increased profits and financing options continue to make franchises popular to the average Joe. .
Re: Which franchise would you buy? - I know this topic is nearly 10 months old, but this is a question you can ask at anytime. It might be interesting to ask, now, once again, what franchise (or in what industry) would you buy at this time? I was recently on a forum and came by the discussion on whether or not a franchise investment in the Advertising industry might be wise at this time? Something along the lines of a sign business, multi-media opportunity, etc. Won't businesses be needing/using these types of franchise businesses more than ever to try and gain customers/clients?


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