Why SA business start-ups have such a high failure rate, and how franchising addresses these
Research by Moneyweb during the last 15 years found that 70-80% of small businesses fail within five years, and only about 1% of micro enterprises that started with less than five employees have grown to employ 10 people or more. This research looked at all business types, and it should be noted that this high failure rate differs from franchising’s failure rate. The most common reason why small businesses fail is often because the entrepreneur started the venture as a result of being unemployed. This means they are essentially starting a business with a shortage of funding, and you can clearly see that this places the franchisee in a completely different category. Therefore, do not be dismayed at the many articles you read about business failure.
The comparable failure rate for franchised outlets is around 10% after five years, which makes becoming a franchisee, as opposed to starting your own business, five times less risky.
The main reason why small businesses fail
Today’s SME operates in an increasingly dynamic environment and has to continuously adapt to the rapid changes that occur in technology, customer needs and market conditions, which few entrepreneurs seemingly are prepared for.
Breaking this down, Forbes magazine developed a list of ten reasons why small businesses typically fail:
- Starting for the wrong reason
- Insufficient capital
- Improper planning
- Poor management and leadership
- Expanding too quickly
- Failure to advertise and market
- Lack of differentiation
- Unwillingness to delegate
- Unprofitable business model
- Underestimating the competition
Franchises reduce risk
The raison d’etre of franchising is to reduce the above risks in the business, and therefore the level of risk will vary with how experienced the franchisor is, how well-proven the business format is and the level of training and support provided for franchisees.
This means that within a properly prepared franchise, the risks of failure by a franchisee are low compared to going into business on one’s own. Imagine an inexperienced person decides to open a delicatessen shop. How do they know what makes a good location; what designs and layouts garner attention; what the menu should contain; or where to source the ingredients from? Furthermore, how many staff should they employ; what to pay them; and what to charge customers?
All these questions have been already worked out and piloted by the franchisor from hard-won experience, as well as from the combined experiences of all its franchisees.
What does franchising bring to the table?
- Brand recognition: The power of brand recognition and built-in demand can be huge. A familiar brand such as the golden arches or Engen sign is a welcome sight to hungry or weary consumers. People seek out familiarity: national advertising increases brand awareness and helps keep the name, product or service top of mind. And consumers know that the brand they love and respect won’t disappoint.
- The kinks are already smoothed out after a lot of planning, trial and error. With a franchise, someone else has previously made the mistakes you would likely make, learned from them and developed workable systems. Franchise owners provide a detailed manual that explains who to buy from and how to effectively produce, market and deliver the product or service.
- You’re not alone: training manuals and educational assistance are typical support offered by most franchisors, whether with location, finance or typical customer questions. Additionally, fellow franchisees are a fruitful source of information.
- Finance is usually easier to obtain as a franchisee than if you were to start a business from scratch. This is because banks have specialist franchise units which understand the business and can more easily predict the risks associated with a franchise. Banks view franchisees as a safer financial bet than independent start-ups.
- You get a better deal on supplies as part of a larger organisation. Franchisors aim to secure the best price on supplies and services and have access to bulk-rate discounts that are typically unavailable to independent business owners.
If you wish to reduce your risk as a business owner, consider a franchise. But do your homework, and check that the franchisor:
- has a successful track record,
- has happy franchisees
- has a respected name, and
- that its likelihood of continued success is high.
Owning a franchise doesn’t guarantee a risk-free business: success is still ultimately up to the business owner. According to US research, 33% of all business bankruptcies was due to staff stealing from the company, and 75% of employees have admitted to stealing from one company. Only a business owner on the store floor can manage that, even with established systems from a franchisor. Nonetheless, your chances for success, longevity and profit can be greater than if you were starting a business on your own.