Starting any new business can be a daunting experience, especially if this is the entrepreneur’s first entry in franchising. Since many others have gone the same route, there is an adequate amount of information out there to help us avoid some of the more common franchise blunders. Here are a few ideas, suggestions and warnings:
Ideas
Always use the system. The parent company has done a lot of research, and has created systems that work, so why reinvent the wheel?
This is part of the appeal of buying the franchise in the first place. One example is the franchisor’s marketing strategies, including any national advertising exposure. Additionally, this insures that the new owner is not committing any violations to the Franchise Agreement.
They should also take advantage of any training that the franchisor offers, even after the business gets up and running. Networking within the company can help with those thorny day-to-day issues. New franchise owners need to know as much as possible about the products or services they are offering. Giving due diligence before the final sale will enable the franchisee to feel more confident in themselves and the product.
Suggestions
The new owner should evaluate his or her own business, and their personal strengths and weaknesses, and get training in those weak areas or hire competent employees who can fill the gaps.
They should not let pride get in the way of business. One major example is the ability to manage and work with employees. Another may be setting up systems and procedures, such as bookkeeping, taxes, payroll, or processes like hiring new employees, ordering supplies, and working with disgruntled customers.
When setting up leasing terms, many new franchisees will want to negotiate with the landlord to get leases that agree to start the base rent low or, in some cases, get the first three to six months free. This will enable the new franchisee to use that money to get the business up and running. The agreement can then include an escalation clause for the future.
It is always a good idea to talk with other franchisees, especially those associated with the parent company. Topics should include any purchasing of equipment. Many experienced owners feel that they should have spent more time looking around for better deals, bought used equipment, or gotten different financing leases or loans.
Other questions should include marketing costs, labor costs, and any tips on saving money on supplies or inventory.
Warnings
First of all, the franchisee must be committed, willing, and able to work within the franchisor’s system. Although there may be room for some creativeness, for the most part most franchising systems don’t allow for much.
The old adage ‘We’re number one!’ is not necessarily a good option when purchasing a franchise, either, because being the guinea pig in a new system may have some sobering consequences.
If on the other hand the new franchisee has done his or her homework, and goes into the venture fully aware of the risks and confident in the product or service they will be offering, this can lead to success.
Although many banks and lending institutions have a tendency to loan money to potential franchisees more readily than to independent small businesses, there’s no guarantee that they will accept every franchisee candidate. A good past business performance, excellent current credit status, and a good business plan are still important factors to take to the loan interview.
One large mistake a surprising number of new franchisees make is their inability to accurately estimate the setup cost of the new venture. Another mistake along those lines is not asking for a loan large enough to cover the initial expenses, and to cover the ongoing need for a steady cash flow until the business begins to bring in a profit.
Most franchise businesses take months to get up and running before the business will turn a profit. Under-capitalization is a leading cause of new franchise failures.
Further, many potential or new franchisees fail to hire a seasoned franchisee attorney to review contracts, and another one to review hiring practices and criteria. The franchisee and their legal representation must go over that Disclosure Document and Franchise Agreement with the proverbial ‘fine-tooth comb’, to be sure that the potential franchise owner understands and agrees to all terms.
The wary new owner must be sure to get everything in writing. Taking the time to do so, helps avoid any unforeseen legal headaches. Many potential franchisees have not foreseen the amount of time needed to start up a new business. Commitment should be assessed before signing on that dotted line, as lack of it will see problems arise when it’s too late to resolve them.
These are only a few mistakes that potential and new franchisees typically encounter. However, with determination, careful research, proper planning, and a grain of salt, the new owner can overcome these obstacles.
Darren Jamieson is the Technical Director of Engage Web and writes for Minuteman Press on franchising in the U.S. and throughout Canada, Australia and his native United Kingdom. He has extensive knowledge of the franchise industry, and of running a business, having helped many franchise clients through Engage Web.