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Why Franchisees Fail

Last week in the Wall Street Journal there was a nice article on Why Franchisees Fail (subscribers only, but a copy is here). Even with an established system you can still screw up royally.

Weathering unexpected situations without a financial cushion can be problematic even for an established franchise. Ed Moran, an accountant in Tucson, Ariz., recalls a McDonald’s Corp. franchisee whose dominance of a small California community was suddenly challenged by the arrival of a competing burger restaurant. The first year, the rival knocked 30% off the McDonald’s store’s sales. Unwilling to scale back on his lifestyle, the McDonald’s franchisee instead reduced his labor overhead and raised prices. “He went into a spiral and never came out,” Mr. Moran says.

Unwilling to scale back on his lifestyle... that sounds like an epitaph rather than a sound business strategy. (In our business plan we still break even with a 20% sales drop.)

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