Do Franchises in the UK Fail or Perform Poorly
for the Same Reasons as Non-Franchised
Businesses in the UK?
Abstract
Research into franchise failure in the UK has tended to rely on surveys that
have concentrated on commercial reasons for failure. It is difficult to identify
failed franchisees and the research usually conflates them with non-franchised
business failures. This study questioned the validity of the reasons given for
failures and explored the causes of poor performance and failure of UK
franchises from the perspective of the franchisee. A qualitative case study
approach is used with three franchisees in order to obtain an intensive insight
that conveys a more holistic understanding of the complex psychological
influences at work in each unique case. Although it is not possible to
demonstrate that the results are universally applicable, this research finds that
franchisees are particularly susceptible to psychological influences that
negatively affect their performance and also that there are disadvantageous
commercial factors unique to franchising which have an adverse bearing upon
the success of franchisees in the UK.
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This article summarises the study undertaken by Keith Marriott as part of his MBA
dissertation which attempted to answer the following questions:
1. Are there different commercial risks facing independently owned enterprises and
franchises?
2. Are the reasons for failure given by franchisees accurate?
3. Are there psychological causes of poor performance or failure affecting franchisees?
4. Are there any cultural or legal factors adversely affecting franchisees in particular?
This research explored whether the reasons given for failure or poor performance in
franchises are accurate and if actual causes are different from those of other enterprise
start-ups, or if there are reasons that affect franchisees more. To do this various commercial
and psychological factors were examined.
This study undertook a multiple-case study (Yin, 2003) or a collective case study (Merriam,
1998; Stake, 1995) using 3 case studies.
Case study A involves a previously successful independent businessman, who has bought a
franchise in a well known (within the industry) and relatively well-established franchised
business, which is performing badly.
Case study B involves an ex-employee of a globally branded Franchise company who bought
a franchise from the company he worked for. His franchise never made a profit and is now
closed.
Case study C involves a previously very successful corporate entrepreneur who bought a
franchise in a little known, relatively new company. His franchise never made a profit and is
now closed.
All 3 franchises appeared ‘normal’ to the franchisees and the public; they were not trading
in unusual conditions or selling unusual products and were located in reasonable locations
that would be assumed to give a good chance of success.
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Franchisors will not supply details of failed franchises, in case it degrades the value of their
offering to potential franchisees; indeed, in one of the case-studies, the Franchisor hid the
fact from new franchisees that all previous franchises had failed. It became apparent
through research and the case studies that the use of punitive non-disclosure agreements
by Franchisors is also commonplace. It is therefore difficult to survey the ex-owners of failed
franchises – they are not identified and, they would often be frightened (as in two of the
case- studies) of the consequences of talking to a researcher. However it is very apparent
that there are high numbers of failed franchises as websites have been built by discontent
ex-franchisees to air their grievances.
Ansoff’s work (1957) exploring the levels of risk involved in growth strategies was used to
assess the risk involved in becoming a franchisee from a commercial and personal aspect.
Whereas Independently owned business start-ups are often created by people with a lot of
experience in their business area, franchisees buy an ‘off the shelf’ company in a market
they often have no previous experience of and this dissertation examined whether
psychological factors such as dispositional optimism and motivated reasoning and
escalation theory play a part in the success or failure of franchisees.
When the lists of reasons for failure in business generally are compiled they are often
arrived at through simple quantative surveys which give rise to data reliability problems This
dissertation used qualitative analysis of case studies of ex-franchisees and a current
franchisee to explore whether the reasons given for failure have been distorted by choice
supportive memory distortion , cognitive dissonance, leading to external self-justification
and attribution biases (amongst other psychological biases) and whether these effects are
prevalent amongst franchisees, who have the opportunity to blame the franchisor for the
poor performance of their business.
The researcher suspaected that franchisees are persuaded by the BFA, the trickledown
effect of glamorous and entirely positive advertising from super brands like McDonalds,
banks and ‘collective intelligence’ that theirs’ is a safe investment because they are buying a
tried and tested formula (and support) guaranteed to bring a good return on their
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investment. For this reason the part played by ‘group think’, both in the initial evaluation of
the idea of buying a franchise and in the decisions made when being inducted with other
franchisees was examined as a possible reason for the poor performance of franchisees.
“Clearly, making an investment in a well-established franchise opportunity with a
sound trading record that has passed the membership accreditation of the British
Franchise Association reduces the risks of the investor.”
Richard Holden, Head of Franchising, Lloyds TSB Business (2009)
However it might be worth noting here that the BFA, which claims on its website that “each
[member] is vetted against a strict code of business practice,” gave Associate Member
status to 24 Self-Video, a UK franchise criticised by Labour M.P., Brian Donohoe, who told
Parliament that victims of 24 Self Video franchises had lost around £2million (Hansard, 22
May 2007).
The following map illustrates the problem of the enormous number of possible
psychological influences that could be investigated in the literature.
Availability Cascade
Source Confusion
Neglect of Probability
Prospect Theory
Sunk Cost fallacy
Illusion of Truth Effect
Escalation Theory
Cognitive Dissonance
False Memory
Motivated Reasoning
Attribution Theory
Crypomnesia
Wishful Thinking
Confirmation bias
Outcome bias
Locus of Control
Conflict Theory
Group Think
Self-Justification
Dispositional
Optimism
Choice supportive
memory distortion
Authority Bias
Positivity Effect
Egocentric bias
Heuristics
Selective Perception
Hindsight Bias
Von Restorff Effect
Biased Pre-decision
Processing
Post-purchase
Rationalisation
Figure 4. Some of the psychological factors that could be could be examined for their effect on the performance or the reasons given for
the standard of performance.
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By examining a range of possible psychological influences the study found that many
psychological effects are at play in determining the success of franchises. In fact the
psychological influences discussed selected themselves. It became apparent after the
participant interviews, which factors had been very influential and those are the main
subjects of examination.
Methodology
A qualitative case study approach, employing semi-structured interviews and triangulation
by observation and the examination of financial and other commercial artefacts was used.
Literature Review
Hypothesis
Data Collection
Concurrent Analysis
Progressive Focusing
Interviews
Lit. Map
Subject Artefacts
Triangulation
Observation
Reselection
of Theories
Interpretation using
Literature
Figure 5. Research Methodology.
This study meets the criteria for grounded theory as objectivity is primarily “in the framing of the research
problem and the willingness of the researchers to pursue that problem where the data and their hunches may
lead” (Vidich and Stanford, 2003, p. 58).
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Conclusions
Although it is not possible to generalise from such a small qualitative study, from the
evidence produced it is the conclusion of this research that:
1.
This research found that the franchises in these case studies performed badly for
specific reasons not affecting independently owned businesses, these included deception
through inability to do due diligence; poor marketing support and differing
franchisor/franchisee aims amongst others, which should be a strong argument for new
legislation to protect franchisees. The idea of franchising as a safe bet is incorrect; from the
franchisee perspective they were situated in Ansoff’s (1957) riskiest ‘diversification
quadrant’ – new products, new markets – and without the core competencies required to
succeed (Jobber, 2006). Of course this should have been mitigated by the franchisor’s
experience and training. However in all three cases the expected support was not received
from the franchisor.
2.
It is apparent from the contradictory assertions in the individual case-studies that
the real reasons for failure are not always proffered and that therefore simple surveys of exfranchisees requesting the reason for business failure may not be reliable. How franchisees
perceive the cause of failure is important (Rogoff et al, 2004), all of the participants showed
attribution biases and Choice-supportive memory distortion. Many of the behaviours
exhibited in the theories examined in this study allow positive illusions that promote wellbeing (Taylor & Brown, 1988) and may therefore be psychologically beneficial to the
individual, but not economically beneficial for the wider community and, as Mather, Shafir
and Johnson (2000) pointed out in their study of choice supportive memory distortion, it
may also lead to people not learning from their mistakes; certainly this is the case in two of
the case studies, because they still believe they made the right choices. Not only will this
distort reporting of the real reasons for poor performance or failure, thus not warning
potential franchisees of the real risks, but it may lead the same people to make the same
mistake again and advise others to do the same. This should persuade any interested party
to consider sceptically the causes of business failure that some groups publicise. Awareness
of these common biases in accounting for poor performance or failure would benefit all
stakeholders.
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3.
This research finds that the causes of failure have psychological not commercial
roots; in all 3 cases the businesses would have been commercial failures – but they should
never have been purchased; the myopia discussed in Escalation theory (Drummond, 1997)
was apparent and all of the experienced businessmen went ahead and signed the franchise
agreement and in some cases continued to try and make it work for too long.
The literature on dispositional optimism is particularly relevant e.g. De Meza and Southey
(1996), and the study by Hmieleski & Baron (2009) is enlightening: “In addition, there is
some indication....that the negative relationship between entrepreneurs’ optimism and the
performance of their new ventures is strongest when entrepreneurs are high in previous
business founding experience and lead their firms in dynamic environments”. This is quite
counter intuitive, but more acceptable after a little consideration. It was the case that all of
our interviewees were very experienced and yet far too optimistic. This certainly needs to
be communicated and more widely understood as a potential pitfall not least because it
may lead to a further problem; an experienced businessman whose franchise fails is likely to
suffer more cognitive dissonance and be more susceptible to attribution biases than an
inexperienced businessman.
4.
The evidence found in this study shows that the participants had been influenced by
the belief of their peers that franchising is a safe bet and the ubiquity of positive messages
put out about franchising by the BFA, the banks, the franchise industry. This is concerning
as no organisation counterbalances these entirely positive messages and McKimmie, et al
(2009) state that “recent work has established that groups can reduce dissonance by
providing consonant cognitions, normative support, or an opportunity to diffuse
responsibility for counter attitudinal behaviour.” (p103).
Franchising is not a specifically regulated business activity in Britain and new franchisees are
not protected by consumer law. Although it is being tested in the courts now, so far UK
franchisors using ‘standard’ franchise contracts, which include single agreement and no
reliance clauses, have been legally almost unassailable by discontented franchisees. MPs
have called for specific franchising legislation to give more protection to franchisees. This
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would have helped in two of the case studies where full disclosure of the historic
performance of all of the franchisees, would have dissuaded them from buying their
franchises. On 22 May 2007, Parliamentary hearings were held to consider petitions
initiated by ex-franchisees who had lost their investments calling for specific governmental
regulation of franchising. This call was dismissed by Margaret Hodge, who suggested that
legislation would dissuade franchisees from doing proper due diligence, seemingly not
understanding the point made by participant C that the kind of secrecy the current laws
allow the franchisors prevents proper due diligence.
Suggestions for Future Research

The franchising industry is very important to the UK economy, but there is little
academic attention paid to it and a more comprehensive study to understand the
extent of the problem is needed. The numbers are important; if it could be shown
that franchises generally failed at a higher rate; perhaps because of the franchisees’
lack of experience in their new market as would be predicted by Ansoff (1957), then
there would be a strong case for better selection and education of franchisees.
Finding the real failure rate could have wide significance; if failure is high and due to
systemic problems, research might lead to better awareness amongst potential
purchasers of the associated risks of franchising, if this caused a drop in demand, the
purchase price of franchises could drop, making them more accessible or forcing less
robust models out of the market.

It is apparent that the real reasons why franchises fail are not always given and that
further research is needed to find out what they.
 It has been argued that excessive optimism is a primary reason why so many new
businesses fail (Gartner, 2005). Further research specifically amongst franchisees is
needed. It was beyond the scope of this study to investigate the relationship
between the ‘myopia’ identified by Drummond (2007) and biased pre-decision
processing, but it is the opinion of the researcher that it is an area worthy of further
research.
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Recommended Action Including Future Legislation

New legislation is needed – at least equivalent of USA UFOC. Current legislation is
being tested in the courts but many in the UK would be surprised that franchisees
are offered more protection in China.

The BFA needs to be changed. Its role was misunderstood by our interviewees, one
of whom feels bitterly let down by it. Two franchisees have recently been appointed
to the BFA board but it remains to be seen how independent or vigilant they are.
Franchises with many complaints against them are still being given membership.

Government and quasi official bodies and banks should be made aware of the
particular risks to franchised businesses (including the lack of disclosure from
franchisors in the UK) and encouraged to publicise them and also dissuaded from
using inaccurate lists.

The creation of a British Franchisee Assoc. prepared to lobby for a change in the
legislation, could address many of the issues raised in this study
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