One of the advantages of franchising is that it allows entrepreneurs to operate a business without having to build one from the ground up. However, the fact that a business has a pre-established brand and procedures does not mean it will be easy to run.
For example, Subway is one of the most popular restaurant chains in the world. Yet, some of their franchisees are finding it difficult to operate it successfully. According to Business Insider, an increasing number of Subway franchise owners don’t like how the company is run, and some believe that the problems will persist as long as the current leadership is still in control.
Investing in a franchise is not a way to avoid doing the hard work. So, before you sign an agreement with a franchisor, you have to be ready for the rigors of operating an actual business.
The fact is, a lot of things can occur between the time you obtain funding and when you finally open your business. But before you relax and celebrate the successful launch of your franchise, it would be good to learn some common mistakes that many franchisees make and how to prevent them.
Steer Clear of the Biggest Franchise Mistakes
A franchise is not 100 percent guaranteed to succeed. It takes a lot of hard work to own and run a business successfully. You also need to put in the time and effort to become profitable. Surely, the franchise structure gives you an advantage, but that extra assistance will not amount to anything if you fail to follow through properly.
The franchisor will not hold business ownership classes for you when you purchase a franchise. Learning how to handle your finances, do tax work, and make sense of your balance sheet requires effort on your part. Buying a franchise does not take away the personal responsibility of overseeing the business’s daily operations.
So you should not take anything for granted if you want your franchise business to be successful. Beware of these four franchise blunders and learn what you can do to avoid them:
1. Don’t Follow Your Gut. While you might want to follow your instincts and learn in the business, you are likely to commit some avoidable mistakes in the process, some of which could have dire consequences for your business. So instead of just winging it, observe existing franchises and conduct extensive research on your own to have a solid foundation of knowledge you can count on during difficult times.
Franchises that seem to have high sales and a low failure rate might just have outstanding recruitment teams behind them. So, don’t assume that buying a franchise will compensate for your lack of business experience. Make sure to learn what it’s like to operate a franchise before diving into it.
Get acquainted with other franchise owners in your area and ask them what they would have done differently if they had the chance to start all over again. Maintain communication with these “new friends” so you can continue to learn from them as you proceed. And don’t forget to keep an eye on the corporate players as well. You will want to stay away from a franchise with a large number of litigations and unhappy franchisees.
2. Have a Fat Bank Account Before You Start. The more money you have to invest in a franchise business, the higher your chances of making a huge return in the near future. If you open your franchise without having enough cash in the bank, you are going to suffer during difficult times. You will also miss out on short-term opportunities.
Many lenders request a personal guarantee on their loans if the borrower has more than a 20% stake in the business. So, the higher the loan amount, the higher the risk for the moneylender. Franchises usually go through several months of significant budget deficits before they start making profits. So, it is important to have a buffer of capital to navigate the ups and downs during the beginning days of the franchise operation.
One franchise financing option you may want to consider is an SBA loan. These kinds of loans reduce the lender’s risk to 25 % of the principal, while the SBA covers the remaining 75%. Note that you will need to go through an underwriting process and fulfill guarantee requirements (usually a 30% deposit and origination fees of about 3 %) to get approved for an SBA loan, but it is worth it.
3. Don’t Choose a Bad Location. One of the pre-opening decisions that can make or mar your franchise is choosing the place where your business will be located. To thrive in today’s competitive environment, franchises need to be situated in easily accessible locations where they can gain customers organically. So, industrial parks won’t be a suitable option. Nowadays, franchise owners need retail visibility, even if they have to pay a higher rent to achieve that.
Choosing the right franchise location takes time and effort. You will have to visit potential locations yourself on different days and at different times of the day. How is the traffic in that area? Would customers be able to see and access this spot, or is it hidden away? If you would need more time to get a good location, contact your franchise headquarters for help or request a time extension.
We know one multi-unit franchisee who has 12 restaurant locations, which cost him about $250,000 each to set up. Many of these locations are highly profitable, but others don’t perform so well, and he had to relocate them. His EBITDA (earnings before interest, taxes, depreciation, and amortization) is about 25 percent on sales of $ 3.5 million per year. His numbers would have been lower if he had chosen bad locations.
4. Note That You Are Part of a System. Probably the biggest mistake a new franchise owner can make is to deviate from the proven processes provided by the franchisor. Failure to follow established programs and procedures to a tee can significantly reduce your chances of being successful in your franchise business.
Franchises have a brand and a reputation to maintain. Although you own the business, you also have to stick to a well-crafted plan. The franchise headquarters have a greater influence on your future than you may believe, and the more you move away from the recommended strategies for training, operations, marketing, etc., the higher your chances of running into trouble.
Go through the franchise disclosure document over and over again. Review franchise agreements and financial documents, and find out how much it typically costs to open a franchise. Go through the operations and marketing manuals and learn the reasons why franchisees fail. Find out what the franchise company requires from franchisees, so you can fulfill the requirements quickly and completely.
Smart franchises are those who hire a franchise lawyer to help go through their franchise agreements before they commit. Franchise agreements tend to give all the control to the franchisor. Although these may be hard to change, some modifications may be needed based on individual circumstances.
There’s no guarantee that a small business will be successful, even if it is a franchise. Entrepreneurial success is only for those who take calculated risks, bring in the right people, and stay away from common mistakes. The more knowledge you have (and the more committed you are) about the business, the greater your chances of achieving success in your franchise business.
