Tell-tale Signs Your Franchisee is Closing Up Shop (and How to Stop it): Part 1

“I’m closing my franchise. I’m out of money. I don’t want to but I have no other option if I’m going to help support my family.”

These are by far the worst things a franchisor can ever hear. But it will happen to you if you spend any time in franchising. In my career I have helped several hundred people get started in opening their own franchise business. This has given me great satisfaction and is one of the things that gets me jump started every morning.

On the flip side, I have seen a number of franchises close, which is one of the things that has given me gray hair and has kept me up on countless nights.

I have worked for or consulted with a variety of franchise organizations. From home staging and computer retail stores to mail box stores and pet services, there are really not that many differences in motivation at the end of the day. While franchisees will start out pumped up and ready to take on the world, you will see that attitude erode over time in even the best brand ambassadors.

There is a difference between being slightly disgruntled and ready to close the doors to a franchise. As an industry, we spend huge amounts of resources to attract new franchisees every year. However, we tend to ignore the warning signs of a franchise that is about to close. A well-oiled franchisee who is continually growing (and paying royalties) is worth his or her weight in gold. Yet we spend a disproportionate amount of time chasing after franchise fees instead of dealing with existing franchisees. If you find out a franchise closes its doors out of the blue and you and your ops groups had no idea it was coming (which has happened to me on several occasions), then shame on you. The information below is intended to help you see the warning signs to help stop this from happening.

Communication slows down or stops
Your franchisee stops showing up for monthly conference calls, they miss regional meetings or annual conferences, don't turn in annual P&Ls, you get complaints from their customers for non-responses, they aren't engaged on your forum boards, they don't respond to calls from your FAC members - these are all early signs. If your operations staff and home office people don't get returned phone calls or emails, that's a sign. Becoming disengaged from the franchise is a big deal you and your ops people need to pay attention to very quickly. When these things start to happen, you need to have a talk with your zee and find out what's at the bottom of their radio silence.

Everything you and corporate does sucks
You roll out a new program and your zee goes off on every tiny detail. Every email correspondence gets a negative response and you are continually second-guessed. While we welcome feedback, there is a difference between constructive criticism and corporate bashing with no solutions offered. The next phase moves to a more radical stage: demanding refunds, threats of class action lawsuits, breaking from the franchise and rebranding their business, etc. Every good thing in the franchise is because of the hard work of the franchisee and every problem is due to the incompetence of the franchisor. This type of attitude can snowball if you don't deal with it head on.

The death spiral begins
One of my mentors was the late Nathan Morton, former CEO of CompUSA and Computer City. He often talked about how a business will see a slow-down in sales and the owner will immediately begin to overreact, stopping advertising, laying off staff members, cutting back on inventory and then their business goes into the classic death spiral. When times are tough, you need to do the exact opposite of what your natural tendency is telling you (like turning your steering wheel into the direction of the skid instead of naturally turning away, which makes it worse). When sales trend down, you need to be even more aggressive in your marketing. You need to find better staff and the right inventory. Once that’s done, you will typically see sales come back. Unfortunately, once the death spiral begins, its hard to get out of it.

Social media signs
You should be "friends" or contacts with all of your franchisees. If you see they have changed their LinkedIn job status, your ears should be perking up. If you see your zee is posting on Facebook about attending new owner orientation for another franchise, that's a bit of a concern. If they are meeting with a recently terminated zee and group of malcontents, that's a sign you should pay attention to. If they are constantly on vacation, playing golf or engaging in some other hobby, you should know. While you don't want to be "big brother," you can get clues on what is going on in their lives to see if there is an issue that needs to be addressed.

Personal/health issues
A troubled personal life is a killer for small businesses. A divorce or messy breakup causes both emotional and financial distractions that have brought down more businesses than I can remember. When a zee starts to have health issues, it also takes time and focus away from the business. There isn't much you can do here except try to offer support as much as possible. More importantly, you need to keep up with what's going on with your zees both professionally and personally. Celebrate their wins (graduations, anniversaries, etc.) and comfort them during their losses.

Financial problems
The No. 1 killer in small business is running out of cash to pay your daily bills. If you have under-capitalized franchise owners who have not been working full-time and aren't following your systems, there is a good chance they will end up shutting their doors.

Ticked off customers
Our franchise is built on referrals and we are fanatical about customer service. When we start to see increasingly large numbers of complaints that aren't getting resolved, that's a huge red flag. For over five years we have used the Listen 360 Customer Feedback system. Each week we send out Net Promoter surveys to each of our customer types. They provide us amazing feedback that we use to help fix a problem, as well as give us great testimonials that automatically populate zee websites and social media platforms. We award zees with customer service awards each year based on their Net Promoter scores. At Showhomes, our score is currently higher than Apple or Costco, which is huge for us. We also do a quarterly mystery shopper program, which has been a big eye-opener. When a zee is struggling with multiple complaints and lower trending scores, we invariably know something is up and needs to be addressed.

The reality is you will lose a certain percentage of your franchisees. The question is: How do you minimize this number as much as possible?