Thinking about exploring the big bad world of franchising? Before you buy into to any brand, take heed of these common misconceptions and mistakes made by franchisees to avoid bitter disappointment, loss and making a quick exit.
1. Franchise Guarantees Success
Franchise or otherwise, every new business is coated in risk.
Don’t make the mistake of thinking that buying into a proven business model eliminates failure. If a potential franchisee thinks, “Hey I know, I’ll buy into the McDonald’s franchise – it’s foolproof!” they’re naïve and foolish.
Big Mac’s don’t translate into Big Money. You might have the name, the image and the packaging, but there are so many other risk factors to consider when buying into any big brand such as location, competitors, operations costs and with high relevance to McDonald’s, the franchise “overpopulation” that dominates many big cities, inevitably resulting in what’s known as internal franchise wars.
Don’t let your eagerness for quick success blind you against high risk factors. Always keep in mind that a franchise business needs to generate significantly more revenue than independent businesses to make up for costly start-up fees, high operations costs and royalties.
According to Small Business Economics, although franchise operations are unquestionably larger scale, better capitalized young firms, independent business startups are often more profitable, therefore their survival prospects are even better than those of franchises.
Potential franchisees need to adopt the same mind set as independent entrepreneurs knee-deep in risk. It needs to be understood that it takes just as much planning, hard work and training to get a “proven” business model off the ground.
2. Being The First Is Bad
Don’t assume that being the first franchise is too bold and risky a move when it can in fact be the very opposite.
If the franchisor has sufficient experience in the industry, a great product and high profit margins don’t be afraid to be the first sheep to follow. Who could get more TLC than the very first franchise? If you’re confident that with their help you could replicate their success, why not go for it.
The common misconception within the franchise industry that “bigger is better” is very often simply down to smart franchisor marketing, aggressive salesmen and a very attractive industry.
A big advantage of being the first is that the start-up fee and royalties can often be significantly lower than widely-established brands. Bear in mind also that the success of franchise sales are directly linked to the performance of current franchises so you can be guaranteed your franchisor will want their first franchise to thrive; you could be given the very best of help and advice on a big shiny platter.
3. You Are Your Own Boss
Nope. That you are not. If you’re entering the franchise business for free reign and independence, the industry is definitely not for you.
Although you’re technically the boss of your own shop of course, you will have little or no say in the general running of the business. Uniformity and consistency is key in franchising. Therefore to ensure continued success, the franchisor will exercise control over the most important areas such as branding, marketing, pricing, trading hours, location and products.
Think of being a franchisee as being part of a football team. The franchisees are the players and the franchisor is the manager.
You sign a contract, get sufficient training, you all wear the same uniform and work hard on the field towards the same goal, but at the end of the day it’s the manager who calls the shots.
4. Not Sussing Out Existing/Pre-existing Franchises
Before buying into the franchise, it’s crucial to suss out existing franchises before you sign on the dotted line.
Firstly, experience-wise, some franchisees are under the impression they’ll be trained until the brand is coming out their ears when often it can just be a very short crash course.
Getting knowledge and experience independent of the franchisor beforehand will be extremely beneficial in terms of preparation and ensuring you’re making the right decision in buying into your chosen brand.
Analysing franchisee turnover is just as important when doing your research. Make contact with previous franchisees and understand why they are no longer in business; it will help you avoid a similar outcome, prevent you from making easy mistakes and you’ll get some solid advice.
Speak to as many franchisees in the chain as possible and pick their brains for your own peace of mind. You can also find useful resources online such as the Franchise Business Review that will enlighten you on the world of franchising with personal insight from thousands of franchisees.
5. Failing To Consider An Exit Strategy
Funnily enough there’s no better time to think of how to get out of a franchise than before you get in.
A franchise isn’t your own business that you can freely run and retire from when you hear a quieter life calling, it’s a long-term investment that you want to one day sell for a juicy profit.
If your franchisor hasn’t a concrete exit strategy in place for new franchisees then it’s up to you to plan your own either by
(a) Getting professional help
(b) Doing your own research
There are plenty of advisors and experts who specialise in franchising and its legal domains who can help you navigate your future goals, but if you don’t want to go the professional route, do your own research before you buy in:
1. Find out on average how long it takes to sell a franchise.
2. Establish whether franchises have sold at a profit or a loss in the past.
3. Find out what percentage of franchise units turnover in a given year.
These 3 actions will help paint a clearer picture of what the future holds. Know that high turnover doesn’t always mean danger, it could simply mean that people are building equity fast and getting out fast as planned.
In preparation for the future it’s also important to run your business as if you are selling tomorrow. This means maintaining careful records of progression that can be read and understood by prospective buyers at the drop of a hat, even if you don’t plan on needing them in the very near future.
This little bit of wisdom should help prepare you for the exciting opportunities ahead, we’ve no doubt you’ll be fran-tastic!