Building a new business has many hidden costs and there are many mistakes that can be made. These mistakes can really hurt your chance of success and avoiding them can make all the difference you need for your new business to be profitable.
Some of the most common mistakes that I will address include lease terms, fit-out costs, equipment, inventory and supply, marketing and labour costs.
Lease Terms: Many franchise businesses operate out of leased spaces. The cost associated with the lease can represent one of the largest investments you will make in setting up your business. A number of key factors are involved in the negotiation of a lease that can make a big difference to your total costs and success.
The first of these is the base rent. This needs to be as low as possible in the beginning; you also have to keep the yearly rent escalation clauses as low as possible. You need to get a rent free period included – try to get at least three to six months of free rent at the beginning. Finally you want to get the maximum lease term that you can so you have the chance to recoup your investment.
Fit-out costs: Make sure that you get a competitive deal from reputable and experienced shop fitters. Going for the cheapest option may cost you in the long run.
Equipment: If certain equipment is not specified by the franchisor then shop around for the best price (making sure that the equipment is reliable) or consider buying used equipment. More importantly have a look at different financing options such as loans, leases or hire purchase which can help you conserve your capital for other business needs.
Inventory and supplies: It is easy to justify over-ordering when you first open a new business so you don’t run out of stock. However over-ordering can lead to massive wastage costs when you get stuck with old stock which will not move.
Marketing costs: If you get caught without a proper plan it is easy to invest too much in over marketing your business early on. What new franchisees will face is a raft of people trying to sell ads and promotions that may or may not help your business. Therefore it’s important to follow the franchisor’s suggestions for a marketing plan as they have had the experience in opening and marketing numerous new businesses.
Labour costs: The largest ongoing expense for most franchise businesses is the cost of labour which can range from 20 to 50 percent. One of the most common mistakes new franchisees make is to hire too many people or to pay too much for the ones they hire. This is the easiest mistake to make but it is also the quickest way to change a business from a winner into a loser from the standpoint of profitability. It takes discipline and focus to stick to the plan in terms of labour, but it can make all the difference in the long-term success of your business.
These are just some of the common and expensive mistakes made by new franchisees – but believe me there are many others that can be made. The advice to a new franchisee is do your research and take advantage of the experience and advice you receive from your franchisor rather than making the mistakes yourself. You can also buddy up with existing franchisees in the network and ask them for their advice and support.
If you have any franchising queries or questions regarding this article please do not hesitate to contact me directly at franchise@cococubano.com or on 1300 094 764. Tony Melhem, FCA deputy chairman, chairman of National Franchisee Forum, founder of Coco Cubano and multi national award winning franchisee.