Owning a franchise is the dream of many aspiring entrepreneurs. The corporate support and guidance of a national or regional chain can seem like a surefire recipe for success. Potential franchisees need to understand that the corporation and the individual owner are completely separate entities. Even though they may share common goals, the success of each can be mutually exclusive.
Here are seven franchise mistakes and some ways to avoid them.
1. Not fully reviewing or Understanding the Terms of the Disclosure Document
According to Inc.com, one of the more common issues with new franchises is a general misunderstanding of the terms of the disclosure. The documents that often run 80 pages or more should be very explicit reviewed by an attorney and understood by all parties involved. Failing to do so could result in a rocky start for a franchisee.
2. Lack of Due Diligence with the Franchise Agreement
Additional legal representation is an absolute necessity with regards to the Franchise Agreement. The franchisee needs to be apprised of the lease, franchise fees, advertising costs, training and a host of other related matters. If anything is unclear or not spelled out, both the attorney and franchisee should seek clarification. This agreement is legally binding and an owner who does not know the specifics is destined to fail.
3. Not maintaining enough Working Capital
Understanding the franchise agreement also informs the potential owner of ongoing operating expenses. New owners should account for all of the operating expenses and makes sure there is ample working capital in the budget to meet payroll, franchise fees, lease payments, the cost of goods and utilities. All of these expenses will come due regardless of whether or not there are customers. New franchisees should plan for the worst and set aside sufficient working capital.
4. Failing to do sufficient Market Analysis
A business that attracts customers in one region could ultimately fail to catch on in another part of the country. Market research and analysis is the only way to gauge the potential success of a franchise. A small upfront investment with a market research firm could prove invaluable to franchise owners when selecting a location and to help determine the demand.
5. Chasing the Hot Trend in the Market
A popular restaurant chain that has eye-popping revenues and huge growth attracts many would-be franchisee opportunists. The problem is that often these newer franchises have never had to weather a down economy. A business model should be proven out in both an up and down market before getting chosen as a suitable investment. Additionally, chains that quickly become popular can just as soon go stale and lose market share.
6. Failing to consult other Franchisees
The best resource for a potential new owner is an existing franchise owner and current franchise locations. New owners should personally get a feel for the business by visiting as many stores as possible and speaking with customers, employees, and existing owners to root out challenges and opportunities. The franchise may not always be forthcoming with some of the problems in the marketplace. Existing franchise locations are also a good way to conduct/verify market demand in the proposed area.
7. Thinking a Franchise is more secure than an Independent Restaurant
According to Forbes.com, franchises fail as frequently as independent businesses. This may seem like a surprise for aspiring owners, but Forbes also quotes Sean Kelly, owner of UnhappyFranchisee.com, as saying that “some franchise chains have failure rates as high as 80 to 90 percent.” A franchise can fail even while the parent company flourishes. The risk is with the franchisees, not the corporation.
Keeping these common mistakes in mind will at least mitigate the chances of failure. Aspiring entrepreneurs need to be well informed and understand that a franchise is not a sure thing or an easy ride to success.