Why do franchisees fail?
For the past 16 years I’ve run a property franchise business, and crucially, I’ve personally sold around 100 franchises.
Which means 100 people and their immediate family entrusted me with a big chunk of savings and a commitment to spend the next five years of their lives helping to build the brand I represented, for mutual enrichment.
Did they all succeed? No. My batting average was 5% fairly swift failures, 10% disappointing relationships and 85% achieving solid viability, ranging from OK to spectacularly good. Would they have been better to go it alone?
All the bank surveys ever conducted on business start-ups conclude that franchising wins hands down, compared to estimates in the range 50% to 90% of business start-ups failing within their first five years.
And of course this matters to the banks, who lend the money, which is why you will secure a bigger proportion of your overall business funding and more favourable terms if you apply to a bank to start a business through a recognised franchisor.
Recently, one of our subsidiary franchise businesses, Ewemove, has come under scrutiny for having an allegedly high proportion of franchisee failures.
What do we mean by failure and do we care?
It’s a sad fact that some franchisors do not care, because what interests them is taking a juicy franchise fee at the outset, allowing the business to develop somewhat, finding a reason to terminate the agreement and re-selling the territory to a new franchisee for another initial fee but now with the attraction of established business contacts.
Is this a good business model?
Short-term maybe, but long term utterly poisonous to a brand.
So let’s assume that failing is a bad outcome for both parties to a franchise agreement. Why does it happen?
What made my heart sink deepest in franchise suitability interviews were the words “My wife/husband/friend and I have always wanted to work together”.
Our failure rate in those cases shot up dramatically, and I can reel off the divorces and acrimonious splits which followed over the years. Business partners must bring different qualities to the venture, or when the going gets tough one will turn to the other and say “I don’t need you, I could do this by myself”.
I would tell prospective franchisees that the first two years in business would be like walking through death valley – it’s called managing expectations. When you are surviving on beans on toast every day a working partner who continues to bring in a salary is a godsend.
My second problem was the franchisee with plenty of cash. “You should take up golf” was my advice.
Our franchise was not entertainment, so if they were joining us then it had to be a serious and all-consuming undertaking. I remember a lovely successful man in Oxford who said “My daughter has recently graduated and I’ve got £150,000 to spend on a business for her, do you think you could help?”
That man then worked seven days a week for seven years and built a fabulous business from scratch, but he had both the money and the motivation to do so.
When Martin & Co started putting its franchisees into high street shops we did rather better than their predecessors in serviced offices and home-starts. At the time I attributed it to footfall, profile, client confidence that this was a business of substance.
But I think another fact was at play – fear. Fear of failure, fear of not being able to pay the rent, fear of having committed to a lease and not being able to walk away. Getting our franchisees into shops made the whole venture a lot more serious and ensured they turned up for work every day.
“A pulse and a wallet” are the two qualifying conditions for a franchise sale, as the old joke goes.
Ewemove operated the tightest scrutiny of its new franchisees that I’ve seen; interviews with the Head Shepherdess, a founder, and (very unusually) peer review by other franchisees. Recruits had to demonstrate a devotion to customer service, and this ethos rapidly established the brand as the UK’s No. 1 most trusted agent on Trust Pilot, where it remains to this day.
It’s a truism that a lack of working capital kills most start-ups.
The venture makes progress but it’s just not generating cash fast enough to cover overheads. Working capital is the cushion that pays the bills until the turning point is reached, typically around year two of trading. Ewemove made sure that its new franchisees had plenty of working capital but I think this contributed to the higher initial rate of franchisee failure, and here is why.
Lettings is a glider and sales is a helicopter. Put energy into a glider and it soars higher, ease off and you cruise on thermals. Stop putting energy into a helicopter and you plummet. If you have just borrowed £50k you have a healthy bank balance. In a few months with low overheads you might still have £45k.
The only mandatory cost of running a Ewemove franchise was the monthly licence fee of £1,000, pre-paid for the first 12-months trading because included in the initial £20,000 franchise fee. It’s easy to imagine new franchisees running the business as a relaxed lifestyle choice. Decide to get serious, and you are still six months away from banking completion fees.
I call it a duvet trap, comfortable franchisees avoiding reality, they needed tough love.
Tough love was administered by The Property Franchise Group. We enforced contractual terms in the franchise agreements and made it clear that this was not a lifestyle business.
The EweMove franchise had been spectacularly popular, surpassing 90 occupied territories by the time we bought in September 2016 from a launch in 2014, and winning unprecedented five-star reviews (“Best Franchise…..”).
However, its early adopters were in reality either soaring upward or falling out of the air. Nick Neil, the new managing director, a top performing sheep (the golden fleece!!) worked with the willing. Of the 2014 and 2015 franchise recruits, 42 have withdrawn from trading, in the vast majority of cases by giving the requisite six months’ notice to end their franchise.
Since 2016 the number of franchisees withdrawing is down to single figures per year and falling year-on-year.
What else have we noticed?
Professional estate agents who join the franchise are likely to outperform non-agents in their first two years trading. However, there is no difference in average performance after year two.
It’s why we are continuing to recruit non-agents with the relevant skill set which includes sales experience, drive and motivation, self-discipline and commercial acumen.
The EweMove franchise is a licence to print money for the right recruits, but as with all franchise opportunities the first test is to look hard and long in the mirror.
- Ian Wilson is chief executive of The Property Franchise Group
Comments (20)
You can’t ascertain the cashflow or profitability of a business from micro company accounts on companies house. To do so is misleading, does not take account of directors loans, dividend payments or any other financials that would benefit the business owner and certainly does not reveal their personal tax situation and how their accountant suggests they manage their business and drawings.
And it is very true that if you sell one house a month you will cover your EweMove fees as we charge £1,000 fixed licence fee and £250 completion fee per property. So a 1% charge on an average house of £275k would produce income of £2,750, less £1,250 leaves £1,500 to be retained by the franchisee. The second completion would leave them with £2,500 and so on.
The £1,000 licence fee INCLUDES: Rightmove, Zoopla, Property Management Software, Website, 24/7 operations support, marketing technology, being part of the #1 Most Trusted Agent in the UK and also the ONLY National agent to be awarded a Top 3 place in the Best Estate Agent Guide for BOTH Sales and Lettings. Most agents can’t buy Rightmove alone for less than £1,000 per month.
So we can throw example after example of highly performing, highly successful franchisees at you and other contributors here and you’ll simply retort with, “yeah but x agent failed” like a child in the playground that has run out of sensible arguments.
I think Ian has already made clear that some agents fail. I have made clear previously that some agents fail. That happens in all models of business. End of story.
But the majority of our franchisees succeed. We help them succeed and offer lots of varied training and support. Yet other contributors here ignorantly state, from no basis of fact whatsoever, that we don’t help franchisees. That is definitely not the case.
Here’s an idea – why not ring up a franchisee and speak with them to find out the real facts. It would only take a moment to properly research a comment that you might be thinking of posting…..a novel idea I know, but come on, it’s worth a try, surely?
A large proportion of your franchisees are in the north so a £275k average house price and £2,750 fee is unlikely.
Also what about the £2k monthly advertising cost that you haven’t mentioned.
In reality the average franchisee would need to complete on at least 2 houses a month just to break even let alone make a decent living.
You would have thought the Directors would draw down their loan account 1st which is tax free rather than take dividends which are taxable ?
My wife bought a Ewemove franchise 2 years ago as a non agent but with a business sales background. Sales have grown almost exactly as per the forecast and only recently dropped below that forecast line as she was unable to find suitable staff to cope with the demand. She now has an associate and expects to continue to grow quite healthily.
The first years of any new business are hard work and you will always have people for whom self employment does not work. She loves it she works hard and as her trustpilot and google reviews show she is good at it too!
Nobody is denying the fact that taleneted individuals thrive as a franchisee which no doubt your wife is All the very best for her
However the story being told to prospective franchisees is misleading
After your first year, you’ll be firmly established and have a steady flow of business. In fact, you’ll only need to be selling one property per month to cover your licence fee, and you get to choose how you spend the rest of your profit !
Only the very few are firmly established after the 1st year let alone make a profit as the heavy defcits at Companies House indicates
TPFG bought a dud when all of the big corporates were panic buying online agencies. It has been damage limitation since to try and defend the decision.
It’s not all about the franchises that go under. It’s also about the ones that are barely keeping their head above the water and not seeing the fruits that were once promised.
There will always be outliers and miracle workers who manage to make something of it but the masses appear to be left disappointed.
Of the few currently succeeding, which ones already had an established lettings portfolio?
Yes sadly that is the case A trawl through Companies House and a X check on Zoopla will reveal at least 10 looking very vunerable
Others shipping losses over from 1 year to the next.
It should come with a Gov’t health warning .
Ian has identified the risks for Husband and wife teams
Some trading looking very vunerable.
Some looking for a late career change but struggling on debts incurring with few instructions One of the newer frarnchisees company name is “New Slate” Ltd a title conveying great hope
Unfortunately looking like not enough instructions to feed 1 mouth yet 2
Sounds a lot like this guy admitting he bought a crock of sheep poo without realising it, where the underlying franchisees had been ‘acquired’ solely for the short term personal gain of the founders, not for the longevity of the brand, or for those suckered in. So he overpaid for an empty vessel. Not the first megalomaniac CEO to be caught out (Fred Goodwin AMRO) by lack of due diligence but £9m in cash for ewemove did represent a big chunk of overall group value.
Wilson uses a lot of emotive (strange/unprofessional?) language for a CEO of a public company, judging by the bounce in share price , the City appear to think his announcement of retirement is probably a good thing.
I think unfortuantely Ian Wilson has relied on the Head Shepherd for input here .Its a challenging market For the HS to constantly bleat about them overperforming has placed him in a difficult situation
Otherwise he wouldnt have said failure rates are down to single figures since 2016 when patentally this is not the case Even just over halfway through 2109 over 14 gone One unfortunate this morning.
He wont be the last until they step up with some help
In fact make it 13 this year Newmarket gone this morning the one mentioned above just had the 1 instruction
https://www.zoopla.co.uk/find-agents/branch/ewemove-sales-and-lettings-newmarket-cleckheaton-96041/
According to Zoopla there are 104 Ewemove branches – when you take out those with no stock it is less than 95 active sheep.
A very different picture to the one painted when Martinco took over this flock……….
“Franchise firm Martin & Co has said that EweMove – the hybrid agent which it purchased last month and whose agents almost entirely work from home – could expand from 90 franchisees to 800.”
Has the Melton Mowbray LE13 branch gone as the Ewemove Leicester North branch is currently advertising properties in Melton mowbray ?
It is a 70 mile , 2 hour round trip from Hinckley to Melton Mowbray – long way to go for a viewing.
Nope Joe and Nikki are doing well. As a short internet search for “ewemove.com estate-agents melton-mowbray”
Would tell you.
OK thanks for correcting me – but why are Ewemove Leicester North also advertising properties in Melton Mowbray ?
Legal Landlord
That’s a very interesting question!
It appears that Ewemove LN and Ewemove MM share the same Rightmove account, whereas they have individual accounts on Zoopla.
Very odd because the Head Shepherd says in his post below that the franchise fee includes a Rightmove subscription so odd for MM not to have their own Rightmove account ?
They are not the only ones, a quick check on Rightmove shows only one account for Ewemove Scotland which covers branches in Edinburgh, Glasgow and Aberdeen.
Similar regional accounts exist in various English regions.
A quick estimate suggests there are approx.10 regional accounts and 20 branch accounts on Rightmove compared with 95 active branches on Zoopla.
Does the Ewemove licence fee only include the use of a regional account on Rightmove?
If so, that suggests only 20 franchisees have chosen to run their own Rightmove Branch account.
Trouble is unless you buy a franchise in a real brand that people know, like burger king they are pointless.
“I would tell prospective franchisees that the first two years in business would be like walking through death valley 2
Unfortunately this hasn’t been the message given to prospective franchisees by Ewemove
After your first year, you’ll be firmly established and have a steady flow of business. In fact, you’ll only need to be selling one property per month to cover your licence fee, and you get to choose how you spend the rest of your profit !
Industry statistics show that EVEN A VERY POORLY PERFORMING SALES AGENT CAN COMFORTABLY SELL ONE PROPERTY PER WEEK per week and most established businesses sell at least two or three times that.
“Since 2016 the number of franchisees withdrawing is down to single figures per year and falling year-on-year.”
Untrue as the list of franchisees leaving since 2018 has been 23 and over So far this year over 12 Pudsey Poole Bolton North Stevenage Bournville Cardiif Salford Altrincham Croydon Streatham Laindon Park Stroud
The failure rate shows no sign of halting with big gaping holes in the major conurbations
A number looking very vunerable harbouring too much debt in need of careful shepherding
The new offer of £250 per board and 20%of the fees in the recutment drive for Local Property Partners To make a decent salary theyare going to need to shift 40 +
The few who have arrived on that basis who have started look very wide of the mark with one of the frarnchisees recruited in June 2018 has just 1 instruction and a couple of sales this year
License to print money …. Is that what they told the franchises that lost life savings and left with life changing debt?
I believe franchises can be good. But the Ewemove brand just seems to greatly underperform compared to others.
I can only conclude they ate offering franchises to the wrong people (which the seem to admit) and the support from head office is not there.
The story seems like TPFG blaming others for the failings without taking any responsibility themselves.
What are Ewemove doing to ensure the failure rate declines?
Their advert still makes it sound (and this news story) that it’s a walk in the park to make money.