Do You Believe This? Under-Capitalization Is The Single Biggest Reason For Franchisee Failure

Used to believe it. Years ago. But I've learned better.

Years ago, I'm sure I might even have written a headline like that one (which appears in a current franchise publication) because all the textbooks and all the "experts" said that the number one reason for business failure is under-capitalization.

Then I started talking to former franchisees and business owners who told me their stories. They had failed. And they had lost tens of thousands, sometimes hundreds of thousands of dollars. 

Wow! For being under-capitalized, they all had a lot of money to invest.

But I knew that Fred DeLuca (Subway) started his business with just $1,000. He was under-capitalized. How did he make it?

And I knew that Jim Cavanaugh (Jani-King) started his business with nearly nothing. He was under-capitalized. (Had to sleep in his car for many weeks). How did he make it?

Then I interviewed Paul Orfalea (Kinko's) and he launched his business as a college kid--he had no money! He was under-capitalized. How did he make it?

And Mary Ellen Sheets (Two Men & A Truck) started her business following a divorce with no money. She was under-capitalized. How did she make it?

The more people I interviewed, the more I heard about people who had no money but had built very successful, profitable businesses.

They were all under-capitalized. So why didn't they fail?

They didn't fail for a number of reasons and chief among them was that they had a better plan. Some even had a proven system. If they followed the system, they didn't fail. They may have still stumbled for a period of time, but if they made good on following the system, they made good on succeeding in their business.

I do not believe that under-capitalization is  the single biggest reason for franchisee failure. I believe that not following a proven system is the single biggest reason for franchisee failure.

Some of the most successful franchisees (and franchisors) I know had the least money to invest when they launched their businesses. And some who failed had the most money to invest.

That may be another cause for failure: Having too much money to invest!