Why Systems Fail

Farmington Hills, Mich. – “I’m all for positive thinking,” says Richard Simtob, President of Finance and Development of Wireless Toyz, “but if you are considering a franchise business model, you should understand why so many systems fail. Despite a brilliant concept, marketing genius and statistically ‘proven’ demand, some of the most exciting franchise concepts don’t make it past the grand opening. You need to be able to identify the winners and the losers, so you don’t put your lifesavings and all your dreams into the wrong enterprise.”

As the driving force behind the growth of Talking Book World, a chain of retail outlets specializing in audiobook rentals, and current President of Finance and Development of Wireless Toyz, Simtob’s own experience has been unquestionably on the success side of the business. That’s why would-be franchisees are beating a path to his door for advice. Even as he guides Wireless Toyz Cellular Superstores; ranked on Inc. Magazine’s “500 List” as one of the fastest growing privately held U.S. companies, is ranked No. 169 in the “Franchise 500,” No. 98 “Fastest-Growing Franchise” and No. 1 in the “Wireless Stores” and “Electronic Retail” categories for 2008 by Entrepreneur Magazine; into national mega-chain status, he makes time to counsel and offer advice. He starts by emphasizing, “hope is not a strategy” in order to urge people to perform all manner of due diligence.

“Every franchise business goes through four stages of growth,” he counsels, “if you are not a risk taker, you probably don’t want to get involved with a company in stages one through three of the following list:

1. The Idea. Every business starts with an idea of a better or more unique way to deliver some product or service to customers.

2. The Prototype. Most franchise companies shape their concept by building out one or more prototype units to test, refine and prove validity.

3. The Early Franchising Efforts. After prototypes are honed, most franchisors experience their sharpest learning curve and most severe growth pains while establishing the first 10-25 franchisees as successful operators.

4. Critical Mass. This is achieved after at least 25 successful franchise operations are up and running.




“As a general rule, the earlier you get involved in any business going through these phases, the greater the risk of failure,” says Simtob, “getting in on the ground floor is not always an advantage with franchises, even though rewards can be substantial. After stage three, franchisors should have gained enough operational experience to increase the likelihood of continued survival.”

So, how does one increase the probability of finding a franchise that will be around for the long term? Simtob recommends diligence in the following areas:

• First, find out how happy and financially successful the existing franchisees are. Look for tangible proof and not just future hopes. Newer franchisees are notorious for rationalizing the reasons for delays in success. Remember, they’ve sunk everything they’ve got into the operation, so they often cling to biased expectations before getting profitable results.

• Confirm the franchisor believes his success is based on the success of the franchisees. Find out if the franchisees believe that statement as well and can show evidence of its truth. Get plenty of examples from them on how this attitude is shown through actions – not just glowing mission statements and other verbiage.

• Finally, look carefully at the support infrastructure of the franchise company, especially in relation to operational support. How long have the support people been around? What was their prior experience? How confident are you and the franchisees in the support team’s ability to help grow the business? You’ll be paying a lot of money for this expertise. You don’t want to find out too late that it’s a case of the blind leading the blind.

“Just because a franchise company has become more stable by the time it gets to the fourth growth phase, there are no guarantees. If the owners have the right attitude and the right focus in their business, you will both have a much better chance of success,” says Simtob, “sure it’s more work to go through a complete investigation to ensure that these essential factors exist, but your reward is the likelihood of buying a franchise which might go under is greatly reduced.”