Why Franchisors Get Stuck
In every business category--and for most businesses--the economic realities of the category create natural plateaus. Some businesses reach the first plateau or second, but can't make the jump to the next; some climb higher. For franchisors, there are specific factors that prevent movement from one plateau to the next.
The First Plateau: Getting Started is Tough
Early-stage franchisors often find themselves euphoric after selling a few units. The franchising fees are welcome income and the royalty checks have started rolling in. But they soon realize the franchise fees haven't covered their initial investments and the royalty fees aren't enough to feed the bulldog. If the first few franchises aren't successful, any prospective franchisees are likely to be scared off. Most franchise systems can't continue unless they move off of this plateau quickly.
The Second Plateau: Where Many Franchisors Get Stuck
Fueled by initial enthusiasm, some brand recognition within a limited geography, and a reasonably attractive concept, some franchisors move past start-up and reach the 20-40 unit plateau fairly quickly. But having saturated their home market(s), they discover the economics of a 20-40 unit system aren't conducive to moving off the plateau. They need management systems to service the growing roster of franchisees, some of whom may not be performing to expectations; they need to move forcefully into new geographic areas where the brand is unknown and where they have no infrastructure to support new franchisees with real estate and construction management assistance; they need franchise marketing professionals; they need effective consumer marketing programs that make good use of their ad funds. Combined, these needs call for an investment in cash and expertise that probably can't be funded by the royalty stream.
It's a chicken-and-egg proposition: in order to grow to the next level, franchisors need more expertise and infrastructure than their systems can support; in order to support the infrastructure and expertise needed, they need to grow.