Running a franchise seems like an ‘easy’ task until you have to do it. As most franchise owners know, the franchise business is less of a blank canvas because it comes with certain elements like branding, marketing materials, and staff training manuals that the buyer must stick to. However, this does not make it less of the buyer’s business.
Most people who purchase franchises do not consider what could go wrong because of how much easier it is than starting a business from scratch. Franchisees and franchisors must be honest and transparent when they make mistakes. This helps to avoid any legal disputes or financial implications and enables a business relationship that is built on trust, which will lead to a successful business.
In this article, we look at the common mistakes made by franchisors and franchisees.
What is a Franchisor?
A franchisor is an individual, company, or corporation that owns an established brand, trademarks, and business model and licenses them to others to operate local branches.
Some of the more common types of stores that franchisors can offer franchisees are:
- Freestanding store: A retail location or restaurant, either newly constructed or an existing structure that does not share any common walls with a third party.
- Shopping centre storefront: A retail location or restaurant that shares a common wall or walls with third parties.
- Gas/convenience restaurants: A gas station, often with a convenience store and restaurant that is a sub- or shared tenancy within a gas/convenience host environment.
- Special distribution opportunity (SDO): Cart or kiosk locations that are referred to as special distribution opportunities and may be located within another host establishment, such as a stadium or another retail facility.
- Online or e-commerce: Licensed branding to an online or e-commerce platform.
Common Mistakes By Franchisors
Like any entrepreneur, franchisors can also make mistakes. Some of the most common mistakes include:
Underestimating Capital Requirements
Many franchisors fail because they severely underestimate how much capital it takes to get to royalty self-sufficiency. Franchisees need to closely question the franchisor on its assets and liabilities or risk finding out that the franchisor has cut corners.
Franchising Before Proving the Concept
Some franchisors will franchise before they have perfected the business model and conducted a proof of concept. Franchisees should check that a franchisor has an established track record with proof of profit potential before looking at franchising. The concept must be perfected and proven in the franchisor’s own business – not that of franchisees. There may be underdeveloped systems that are sufficient to get managers up to speed, but not new franchisees.
Franchisors Can Be Greedy
Some franchisors can become greedy and try to generate additional revenue, unfairly, from product supply and rebates instead of driving prices down for franchisees. The franchisor’s main profit driver should be royalties on sales, as this creates an alignment of interests. The franchisor’s role should be to get franchisees running profitable businesses.
Lack of Full-Site Evaluation
In many cases, the franchisor does not conduct a full site evaluation. It’s critical that franchisors ensure that site assessments are done thoroughly for each new outlet to prevent franchise failure due to a bad location.
Franchise Selling Franchises to Clear Debt
Some new franchisors get into a debt trap and sell franchises just to survive. When a franchisor is selling to survive, they make bad recruiting choices and accept franchisees who may be a poor cultural fit for the business. An abundance of resales will spook strong candidates into investing in another, more stable franchise – it should spook you too. Equally important is ensuring a match with franchisees having the right personality type for franchising. Check that the franchisor is selective and uses psychometric assessments to better assess potential franchisees.
Insufficient Franchisee Training
Franchisors can provide insufficient franchisee training because they assume the franchisee knows how to run a business already. Proper initial training should be linked to the operations manual and should cover all aspects of the franchise business, including general business training.
Adding No Value To The Business
A mistake most franchisors make is to be less involved with adding value to the franchisee and ensuring their profitability, but rather concentrate only on policing franchisee conduct.
Non-updated Systems
The operations manual/system should always be kept updated. If not, it is not a living reference tool that adapts to changes in the business environment. This implies it doesn’t add value to franchisees and is most likely being generally ignored. Make sure it’s online and user-friendly.
Neglecting Brand Development
That brand is most likely the primary reason that franchisees sign up to the network. Not investing in it is competitively detrimental to a franchise. Franchisees expect consistent marketing efforts for their marketing contributions.
These are common mistakes that franchisors can make. It’s important that potential franchisees conduct thorough due diligence before putting capital into a franchise.
Franchisee Common Mistakes
Franchisees are also human and can make errors in their pursuit of acquiring a ready-made business. Some of the most common franchisee mistakes are:
Forgetting That a Franchise Is Still Your Business
One common franchisee mistake is the belief that the business ‘runs itself’. Realistically, the franchisee is responsible for operating the business, implementing procedures, and managing staff. Remember, a franchise is a tool, not an automatic machine. Evaluate your skills and commitment before deciding.
Underestimating Total Costs
Another common franchise mistake is focusing only on the entry fee. Often, there are additional costs such as site fit-out, local marketing, hiring, equipment purchases, and ongoing bills. Prepare a detailed business plan and ask the franchisor about every possible cost. Also analyse how long it will take to recoup your investment.
Selecting a ‘Trendy’ Concept Without Fit
Just because a franchise is popular in a big city or on social media doesn’t mean it will work in your location. This is a classic example of how franchising can have drawbacks when the concept doesn’t match the market. You must analyse the market and your own strengths. Pick a system you understand, a brand that interests you and one that has real demand/market traction.
Not Analysing the Franchise Agreement
Franchise drawbacks can appear in the contract, e.g., hidden fees, growth limits, and high termination penalties. Unfortunately, many beginners sign without a thorough review or consultation. Make sure you consult with a lawyer who specialises in franchise or contract law. Also, ensure you understand every obligation and potential risk before signing.
Skipping Local Market Research
A common mistake made by franchisees is thinking that if a franchise works elsewhere, it will work in your market. Each location has different needs, competition, and consumer behaviour. Conduct market research, check competition, demand, site availability and local customer preferences before breaking ground.
Poor Mental and Operational Preparation
Many franchisees underestimate the challenges at the start. They think the “famous brand” will make everything smooth. But running a unit is daily work, pressure, and responsibility. You must prepare both mentally and operationally and consider whether you have enough resources for any potential challenges.
Relying Solely on the Franchisor
A franchise provides support, but it won’t replace your initiative and entrepreneurship. Over-reliance on the franchisor is one of the key franchise drawbacks that can block your growth. Leverage the tools the system provides, but also develop your own initiatives within the allowed framework.
Franchising is still a great way to build your own company, but you must choose wisely. Understand the common mistakes in franchising and develop a strategy to help you avoid them
