In many ways, running a franchise can be more straightforward than starting a new business. But you shouldn’t expect franchise ownership to be all sunshine and rainbows.
There is still a steep learning curve involved with running a franchise business successfully. The fact of the matter is that many new franchisees overlook the details and make costly mistakes.
While most mistakes may have a minor impact, some can be devastating.
To ensure you remain on the fortunate side of franchise investing, I’ve compiled a list of the most common mistakes new franchisees make when buying a franchise. Avoid these pitfalls, and you’ll be one step closer to success!
Mistake 1: Not Doing Your Due Diligence
Franchise businesses, indeed, have a notably low failure rate. In fact, some franchises boast success rates of more than 90%. However, there’s always at least a small risk of failure, even when running a franchise for a household name brand. And one of the most common reasons franchisees fail is that they neglect to do their due diligence.
Before you sign any contracts, you need to thoroughly research the parent company. The best place to start is with a SWOT analysis.
Keep in mind that while the Franchise Disclosure Document will have some valuable information, it likely portrays the franchisor in the best possible light. To get more sincere insights into what it’s like to work with a franchisor, I recommend talking to existing franchisees and doing your own research.
Mistake 2: Skipping the Market Research
Some entrepreneurs open franchises with the naïve business plan of ‘build it, and they will come.’ However, assuming a big brand name is enough to carry your franchise to great success is a rookie mistake.
Even though you’ll be providing services and products on behalf of a well-established brand, you still need to perform in-depth market research. Find out about the demand for your franchise’s services in a particular area by analyzing demographics, consumer spending habits, seasonal changes, and forecasts. Also, don’t forget to check out the local competition, and plan ahead for increased competition and other unexpected challenges.
Mistake 3: Skimming the FDD
The Franchise Disclosure Document (FDD) can be long and full of technical jargon. Still, you need to go through this document with a fine-toothed comb, making sure you understand every element.
The FDD contains information on a franchisor’s management, CEO, business background, franchise fees, legal history, training and support provided, initial investment costs, and much more. While not a legal requirement, some FDDs also contain financial performance data.
If there are sections of the FDD you are unsure about, I highly recommend having your legal counsel or a franchise expert look over it to point out any red flags.
Your franchisor must give you an FDD at least 14 days before you sign the Franchise Agreement or pay any franchise fees. You can think of your time with the FDD as test driving a car and signing the FA as making the final purchase and driving the vehicle off the lot.
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Mistake 4: Miscalculating Startup Costs
I’ve seen many franchises fail or fall short of their expectations due to unexpected or miscalculated startup costs. Some entrepreneurs, particularly novices, are far too optimistic when calculating their initial franchise investment. But when it comes to mitigating business risks, it’s better to err on the side of realism than blind optimism.
I recommend starting out with at least 20% more capital than you anticipate needing. Staff sick days and shortages, compliance issues, development delays, and interest rates can all cause your franchise startup costs to increase rapidly and by a significant margin.
Mistake 5: Selecting the Wrong Location
Another common factor behind franchise failure is the franchisee’s poor choice of location. In many cases, franchisees attempt to keep their costs as low as possible while complying with their obligations to the franchisor. But even city centers have streets with barely any foot traffic, and businesses on the outskirts can compete for your customers with deliveries.
On top of foot traffic, you need to consider factors such as local consumer spending habits, lease price, and access. A gas station’s revenue stream can be crippled by road or construction works.
Carry out a comprehensive franchise territory analysis when you enter into a franchise agreement to determine the exact location to choose and how to make the most out of your assigned territory. You must also carefully analyze and potentially negotiate your territory restrictions and rights.
Mistake 6: Not Securing Enough Funds
Just as miscalculated startup costs can cause a franchise to fail or fall short, so can having too little funds to sustain the business until it becomes profitable. Securing funding for a franchise is not a simple task, and knowing exactly how much you need can be even more of a challenge.
Using the information in the FDD, you may be able to estimate your ongoing costs roughly. Moreover, as part of your FA, your franchisor may request that you access a certain amount of capital in unencumbered funds to sustain the franchise until it becomes profitable.
It’s also worth noting that it can take several years for a franchise to become profitable in some cases. So, make sure you have enough capital on hand to survive any unexpected citations.
Mistake 7: Failing to Read the Franchise Agreement Carefully
Once you sign the FA, making changes to the terms of your business arrangement becomes very challenging. You’ll be committed to meeting your franchisor’s high expectations for a minimum term of five years in most cases. The Franchise Agreement is a legally binding contract, so you must read it carefully. You may want to work with a franchising expert to go through your FA before ink touches paper.
Mistake 8: Setting Unrealistic Profit Expectations
One of the most appealing aspects of investing in a franchise is the high chance of success. Franchise failure rates are far lower than they are for independent startups. Some estimates suggest that 50% of franchises survive past their fifth anniversary, but only 4% of startups achieve the same. However, the definition of success is subjective.
Many franchisees overestimate their potential profits and feel disappointed with the income they actually manage to bring in. If you don’t realize the earnings of your expectations, you may just have to take a pay cut on your personal income until the end of your franchise term.
Again, instead of being blindly optimistic, be rigorously realistic.
Mistake 9: Neglecting Local Marketing Campaigns
Most franchise parent companies handle large-scale national advertisements, so you may be required to contribute to your franchisor’s advertising fund. While these marketing campaigns may benefit all franchises on the whole, you shouldn’t neglect local marketing.
Every community has unique needs, so your local marketing strategy will likely differ from the franchisor’s broader campaigns.
Think of it this way: Large-scale advertisements build the franchise’s overall brand awareness, while local ads speak more directly to your customer base. You might need to do more than you think to make your franchise appeal to your local market.
Some of the best ways to market your franchise to your local community are to sponsor events, work with local media platforms, and connect with social media influencers based in your area.
Mistake 10: Not Adapting to Market Changes
One question I always urge new franchisees to ask themselves is: Are you investing in a brand based on its current success or the success you perceive it will enjoy in the near future (or both)?
Brands come and go all the time, and while the big names in franchising aren’t likely to disappear any time soon, those who fail to stay on top of emerging trends are often those who fail.
Think of Blockbuster, for example, which virtually disappeared overnight due to failing to adapt to emerging technologies such as downloading and streaming.
Always consider emerging trends and technologies when deciding which franchise to invest in.
Mistake 11: Underestimating Ongoing Expenses
Many new franchise investors predict their expenses, particularly when they’re just starting out, with the goal of spending as little as possible.
Unfortunately, many ongoing expenses are unavoidable, and underestimating them can seriously harm your cash flow and bottom line.
When calculating your expenses, make sure to include royalty payments, marketing fees, payroll, inventory, insurance premiums, and supplies. Also, be prepared for unexpected costs like accidents at work, equipment failures, staff turnover, and potentially fluctuating interest and inflation rates.
Mistake 12: Not Taking Advantage of Franchisor Support
It’s tempting to try and do everything on your own as an entrepreneur, but neglecting to exploit your franchisor’s support obligations as a franchisee can be a big mistake.
At the end of the day, your franchisor is obligated to provide ongoing support as part of your royalty fee. It means you can take advantage of their expertise and skill sets that you may not currently possess, and it can significantly ease the learning curve of running a busy business. After all, when you are successful, the franchisor is successful, so it is in their best interest to assist you.
Mistake 13: Hiring the Wrong Team
Hiring the wrong team can cost any business dearly, and franchises are no exception. Some franchisees rush the staffing process, assuming that the franchisor’s standardized training and operational guidelines will be enough to hit the ground running. However, poor hiring choices can result in low workplace productivity, disputes, high staff turnover rates, and low customer service, all of which can have significant adverse effects on your franchise.
Hiring a new team member costs companies nearly $5,000 on average, so you should do everything you can to hire the right staff.
When finding your team, I recommend standardizing the screening and interviewing process, sourcing candidates strategically using multiple channels, and defining job roles and expectations as clearly as possible.
Mistake 14: Overlooking Work-Life Balance
In many ways, opening a franchise is more straightforward than starting a business from scratch, but it certainly isn’t “easy money”. As with any type of entrepreneurship, you’ll have to work hard for success.
Most franchisees work very long hours for the first few months or even years of running a new franchise, which can make it difficult to maintain a healthy work-life balance. It’s worth considering how this commitment might impact other areas of your life to determine whether it’s a sustainable business arrangement.
If you don’t have a franchise business partner, you’ll be fully responsible for managing and operating the franchise as well as meeting your franchisor’s performance targets. So, do not overlook the impact of running a franchise on your work-life balance.
Mistake 15: Relying Too Much on the Franchisor for Success
Access to franchisor support is a huge asset, but your goal end goal should be to become self-sufficient.
If you rely too heavily on your franchisor for ongoing support and training beyond the minimum, you may end up paying higher fees. Moreover, as franchisors are focused on the entire network of franchises, depending on them for input on business decisions could result in overlooking local market needs.
Being self-sufficient allows you to solve problems quickly, innovate for your local market, and potentially even reduce the cost of certain supplies and inventory. Moreover, when unexpected issues arise, resolving them efficiently often means acting quickly without waiting for the franchisor’s input.
Mistake 16: Not Understanding Territory Restrictions
Your FA will dictate your territory rights regarding the boundaries with which you can operate. These boundaries may include different parameters, such as specific geographical boundaries or the number of households.
However, it’s crucial to understand whether you have exclusive or non-exclusive territory rights. If you have exclusive territory rights, no other competing franchise for the same brand can open in your area, but this can limit your own potential for growth. Without exclusive territory rights, another franchise could open practically on your doorstep.
Mistake 17: Failing to Prioritize Customer Experience
Customer retention and satisfaction should be your top business priorities, and you shouldn’t rely on your parent company’s brand recognition to achieve them. Your goal should be for customers to return to your franchise locations specifically because of the customer service.
If you don’t provide your customers with a positive experience, not only will they be less likely to return, but they may also tell other potential customers about their negative experiences. In other words, customers are more likely to vent than to recommend.
Mistake 18: Micromanaging Instead of Leading
Just as you don’t want to be too reliant on your franchisor, you don’t want your employees to be too reliant on you.
Constantly monitoring and micromanaging employees can make them feel overwhelmed and anxious, decreasing their performance and instilling a dependency mindset. Micromanaged employees often stop thinking for themselves and seek approval for everything to avoid retaliation. They often suffer from stress and resentment, leading to burnout and a high turnover rate.
This is why I recommend being a leader for your employees, but not their warden.
Set Yourself Up for Franchise Success
By taking steps to avoid these common pitfalls, you can set yourself up for success and avoid costly mistakes. That said, you shouldn’t expect to get it all right immediately. Franchise ownership comes with a steep learning curve, and some minor mistakes should be expected. If you are a new franchisee looking for assistance in making informed, data-driven decisions, Franzy is the ultimate resource. From expert insights to comprehensive franchise research tools, we are simply the best way to navigate the franchise industry with confidence.
