Why do startups fail & are franchises a safer option?

4 years ago

Arek EstallGuest blog by Arek Estall, Founder & Owner of an SEO, digital marketing and social media agency in South Wales.

Starting a business is one of the most exciting things you can do. Going into the unknown, building your own destiny and calling the shots are great reasons to start a business.

That uncertainty and fine line between success and failure is what drives many entrepreneurs and gets them up in the morning.

Independent research from Startup Britain shows that more than 8,000 businesses start up every week in Britain. That’s an awesome figure for anyone into startups and underlines that the nation is undergoing a startup revolution.

However, creating a startup can be a high risk occupation. 80% of businesses are expected to fail in the first 18 months and according to the Bank of England, a third of UK businesses are not profitable.

Meanwhile, franchises are enjoying some great figures that buck these trends. The best stat of all is that 92% of franchises are profitable, according to the BFA (British Franchise Association).

Why do startups fail, anyway?

Well, according to research from CB Insights the number one reason for failure is ‘they make products no-one wants‘. The entrepreneurs thought their product would be a success but when they actually started, the demand wasn’t there.

The top four reasons for failure:

1. Lack of market demand for the product (42%)
2. Lack of sufficient capital (29%)
3. Assembly of the wrong team for the project (23%)
4. Superior competition (19%)

Given these points, the formula seems simple, but we know that in reality execution is less so.  To get it right you need to have the right product, enough resources, and a strong team, to compete with the big boys.  Get any of these ingredients wrong, and the recipe might not work.

How franchise businesses can overcome these issues

What’s interesting about franchises, is that in many ways they negate the issues.  (Our thanks to Sam Butterworth from Tubz Vending Franchise, who helped us understand how the franchise business model relates to the top reasons for failure).

The biggest issue was lack of demand.  The beauty of a franchise is that it’s a business model that works, with proven demand. As long as you get the location right, you negate the biggest reason that startups fail – since consumer demand is already proven. Choose a successful franchise, and you’ll be guaranteed the product is one people want.

The second biggest reason for failure was a lack of sufficient capital. While franchises can be expensive to invest in, the franchise company will often help you develop cashflow projections and budgets. While the option is no cheaper than going it alone, you can budget better and manage expectations from your source of finance.

Then there’s the personnel issue. Many businesses hire the wrong people for the wrong job, hence this being the third biggest reason for failure. Sometimes it’s because the new business owner is inexperienced in recruiting people, or hiring for the wrong skills. Franchise companies will generally suggest what types of skills you should recruit for, have recruitment processes in place and be able to share best practice what channels will work best for hiring which staff.

The fourth most-cited reason for business failure was superior competition. There are a whole list of reasons businesses gain competitive advantage. However, often this is because a small business owner can’t compete with established brands who have more buying power, and can command lower prices from suppliers. That means the big business can afford to drop prices, without losing margins. That makes it hard for one-man-band to compete. Franchises negate that a bit – as franchises will generally have excellent buying power, allowing their franchisees to compete with the big boys on a level playing field.

The conclusion?

Let’s be clear, a franchise business isn’t for everyone. If you enjoy the freedom of calling the shots on branding, product range and customer experience, you may be better off starting up on your own.

But if you want the challenge of being your own boss, with a proven recipe for success and reduced risk, a franchise might just be the winning formula.

For more help and advice, visit the BFA (British Franchise Association) website.