Why Franchising Fails?

After working across every side of franchising – from franchisee and franchisor to consultant – Steve Lee, Managing Director of The Franchise Consultant, BFA Approved Advisor, and author of Bought In, has developed a rare inside view of what separates scalable franchise brands from those that stall. Drawing on years of experience across hundreds of franchise businesses, he reveals the challenges founders rarely anticipate, from the importance of recruitment systems and network culture to the fundamental shift franchising creates in the entrepreneur’s role itself.

What have you learned from working with hundreds of franchise businesses that most entrepreneurs would never see from the outside?
I’ve been on both sides of the fence here, let’s call it BF and AF, before franchise life and after franchise life. I’ve been an operations director helping a seven-person business grow to a hundred and eighty, I’ve been a franchisee, a franchisor and now I run a franchise consultancy that works with franchisors at every stage and franchisees starting their journey. What I see consistently from the outside-in is that franchising looks like it’s all about the brand. From the inside, it’s almost entirely about the process. The number that always surprises people is the conversion rate. The BFA’s own figures suggest franchisors typically speak to 100 to 150 enquiries for every successful franchisee signed. I’ve watched franchisors generate hundreds of leads a year and convert a tiny fraction of them, without quite knowing why. They count leads in and franchisees out, and assume the gap is just the nature of the game. It usually isn’t. It’s the process between. The part that nobody warns you about is that franchising changes your job. The day you sign your first franchisee, you transition (maybe slowly) from running your business to running franchisees. Most founders don’t expect that at all they thought they were investing in a way to grow but what they end up getting is a different role altogether.

What’s the biggest misconception entrepreneurs have about franchising as a route to scale?
The one I hear most often is that franchising is a way to grow without doing the work, no one says it but it is evident in a lot of cases. People come to us believing, I’ll franchise, someone else will put in the capital, and the business will multiply on its own. What I tend to steer them towards understanding, is that they’re not removing work, they’re swapping work. Instead of opening locations, they’re building a recruitment machine, an operations manual, a training program, ongoing franchisee support, regional development, and a network culture. Obviously, none of that exists when they start, they have to build it and we support them with this. The other misconception is that the royalties roll in passively, they don’t, at least not in my experience. The franchisors I’ve seen do really well are the ones who treat franchisee success as their main driver. The royalty income follows from that. Those that get distracted by the recruitment fee tend to end up with networks that struggle, because nobody recommends them and nobody stays.

What separates a franchise that becomes a national brand from one that never gets past a handful of locations?
Looking across networks that I’ve watched scale, and those that didn’t, three things tend to separate them. Firstly, an honest understanding of what they actually had. The franchisors I’ve seen reach 30 units and more almost always knew very precisely what was replicable about their model and what wasn’t, before they started recruiting. The ones who stalled often tried to franchise something that couldn’t really be transferred without them and then tried to adapt the model to fit the franchise. Secondly, recruitment is treated as a system rather than a hope. Networks that scale by building a proper qualification process, multi-stage, and a candidate assessment structure, with the discipline to say no to fee-paying applicants who don’t fit. The ones that stall tend to sell to whoever turns up with the cash, suffer as a result later. Finally, real investment in their franchisee’s performance, brands that get to national scale are obsessive about validation, training, and developing what works across the network. They treat franchisee underperformance as a problem to solve, not a franchisee issue to blame. In my experience, the second point is where most growth gets stuck when a network gets to five to ten units by selling well, then realises it’s sold to franchisees who are not really the right fit and struggle to operate the business stopping growth due to underperformance.

At what point is a business actually ready to franchise, and how do founders get that wrong?
The answer to this is not always straightforward, however, when you can document it, when someone else has run it without you, and when the revenue and profit work for a franchisee who’s paying you fees and royalties on top of running the business.  The main areas I look for are a strong trading history, demonstrably profitable, a repeatable model, processes that exist outside the founder’s head, and ideally a second site or operating unit that proves the model works without them. For me, the real test isn’t turnover, it’s margins, and consistently strong EBITDA over time. Where I see founders get it wrong is in franchising too early, when the economics only work because they’re running the business themselves. A franchisee can’t pay you a fee, pay royalties, fund their own marketing, pay a manager where needed, and still make a proper living out of margins that just about supported the founder. The numbers need to work for both sides. If they only work for one, the network tends not to grow. The other thing I see is people thinking franchising will fix a business that’s struggling, it definitely won’t. In my experience, franchising amplifies what’s already there, for better or worse so if the business is strong, franchising magnifies the strengths. If it’s wobbly, it magnifies the wobbles.

What are the biggest red flags you see that would make you walk away from a franchise opportunity?
There are a handful that I tend to look for, and in my experience they often cluster. A franchisor who seems more interested in the franchise fee than the candidate, if the qualification process is light, the early signs aren’t good. The franchisors I respect take franchisee fit seriously, they ask hard questions, slow the process down, and sometimes turn people away. The ones who don’t, are likely only focused on the franchise fee and you need to be wary.  Existing franchisees who won’t speak openly, reference conversations should be open, and if you can’t get unfiltered access to current franchisees, or the ones you do speak to feel rehearsed, I’d pause and ask why.  Unit economics that only really work in the franchisor’s hands. I’d always ask to see the territory P&L assumptions, and then look at them honestly once the franchise fees, royalties, and marketing levies are layered in. My own rule of thumb is to take 60% off the projected figures and see if the numbers still work for me. If they don’t, I’m not necessarily saying I wouldn’t take up the opportunity, but I’d want to know what the worst case looks like before I commit. Projections, in any industry, tend to be optimistic by nature, and taking them with a pinch of salt is just sensible. A model that depends too heavily on the founder personally. If everything works because of the founder’s relationships, judgement, or hands-on involvement, that’s a difficult thing to transfer to a franchisee, and it’s worth asking how the network operates without them in the room. And a franchisor who is defensive about scrutiny, the good ones I’ve worked with welcome the questions, because the questions filter out franchisees who would have struggled. The ones who get prickly are usually prickly for a reason.

What do the most successful multi-unit franchisees understand that others don’t?
Honestly, I want to be careful with this one, because I haven’t worked closely with that many multi-unit franchisees directly. Most of my work has been on the franchisor side, helping networks build out, so my view here is more observational than drawn from lived experience inside a multi-unit operator’s business. From what I’ve seen across the industry, the pattern that seems to separate the successful multi-unit operators is recognising that the second unit is a different business from the first. The first is owner-operated, the second is managed which is a different skill set and mindset, with a potentially different financial model, and it tends to be where multi-unit attempts come unstuck, when franchisees try to run two units the way they ran one. What I can speak to with more confidence, from the franchisor’s perspective, is the relationship side. The franchisors who scale well know exactly who their best operators are, and they tend to reward them with the most attractive opportunities. The franchisees building larger portfolios are usually the ones the franchisor trusts most, that much I do see all the time.

Are you seeing a shift in the type of entrepreneur buying franchises, and what does that say about the market right now?
Yes, and probably in more than one direction. The most consistent thing I’m seeing is that candidates are more cautious, and they ask more questions than they used to. People are doing far more due diligence before parting with their money. They’re reading the franchise agreement themselves, asking for projections, wanting to speak to multiple existing franchisees, and not taking anything at face value. which I think that’s a healthy thing for the industry. The other shift, and this one is more recent, is the number of prospects coming through who are looking at franchising as a route to self-sponsor a UK visa. Those conversations need careful handling, because funding rules require a settled right to live and work in the UK for the duration of any loan, and the path isn’t always as straightforward as some are led to believe. But the volume of enquiries from that direction has grown noticeably, and it’s a category of buyer the industry didn’t really see in large volumes a few years ago. Beyond that, I think there’s a broader sense that people are looking for more control over their working lives in a way they weren’t ten years ago. The pandemic accelerated it, and the cost-of-living squeeze has accelerated it again. To someone leaving a senior salaried role, or coming out of redundancy, a proven model with documented systems can look materially safer than starting from scratch. What it means for franchisors is that the candidate sitting opposite is increasingly someone who’ll do their homework, model the numbers, and ask the network questions it hasn’t been asked before. The networks that respond well to that scrutiny tend to grow well. The ones that don’t, find their pipeline a bit thinner than they’d like.