When you buy a franchise, there is a brand, training and franchisor support on hand. However there are still risks in running your own business.
However some of the most common ways to find yourself in trouble as a franchisee can be easily avoided.
Nine things that contribute to franchise failure
Let’s start at the beginning.
Poor due diligence
If you fail to review the disclosure document and franchise agreement, you’re setting yourself up for problems.
Both documents provide valuable information that will help you to make a well-informed decision about buying the franchise.
The disclosure document will give relevant insights into the franchisor’s business including past criminal, civil or insolvency proceedings, site selection policy, and the obligations of both the franchisee and franchisor.
The franchise agreement is effectively the business contract between franchisee and franchisor, and contains vital information for every franchisee.
Backing this up is skimping on pre-purchase advice. Of course getting expert opinion from a franchise-experienced lawyer or accountant will cost – but a good legal or financial advisor will point out any red flags in the franchise agreement clauses or in the figures provided.
Putting passion before profit
You might love the brand with a passion, but will it make money for you?
Franchisors naturally want to sign up enthusiastic business owners but it’s important not to let your heart rule your head.
It is profit margins that will keep you trading so look for a business that combines good financial potential with a job you can enjoy, day after day.
The industry you choose might not be the most outwardly exciting, but it could deliver the results.
Not talking to existing franchisees
Other franchisees can provide useful insights into how the franchisor operates, how effective its systems and processes are, and whether it delivers on its promises.
Franchise buyers can speak with both current and previous franchisees and this is a great opportunity to find some of the pain points in the business.
Chatting with a cross-section of franchisees – those who are new to the business and experienced franchise owners – gives you a broad overview. Not everyone will be happy, but analyse how important their dissatisfaction is in relation to your own approach to business.
Some problems you might encounter may not be big issues, but consistent complaints about similar problems would raise concerns.
Not thinking about your exit
What is your long term plan? Even if you intend to renew your franchise agreement for the maximum number of times, you will need to know how to get out of the business.
A clear succession plan, or a decision to sell, can always be adjusted. However it helps to shape how you will run the business. You can also analyse its potential for you to achieve your goal in the time frame you set.
Being overly optimistic
It is important to have realistic expectations about what the business can achieve under your leadership.
This is why you need a good understanding of how you will make money, what skills you bring to the business, and the level of support available to you.
If your expectations are misaligned with those of the franchisor in terms of benchmarking financial performance, in regard to the support the franchisor will provide, that can lead to dissatisfaction and poor performance.
Insufficient training and guidance
If you lack the requisite training to competently operate, and grow, your business, you’ll be in danger of underperforming.
Find out whether the training on offer, upfront and ongoing, will help fill your skills gap.
And what about development? Does the franchisor add value to business growth discussions and strategy? This is a great insight to gain from conversations with other franchisees.
It can be tempting once the business is performing well to reward yourself for all the hard work. An extravagant lifestyle or over-capitalising in the business, can lead to cashflow concerns which can spiral out of control.
Keep an eye on the spending, and update your working budget to suit current situations.
Complacency and distraction
There comes a point in every business when the owner has reached a plateau in performance. The choice is to either sit back and enjoy what’s been achieved, or look for new opportunities for growth.
Another way to lose focus and drive is to be distracted by external business opportunities or hobbies. This can easily happen if business is going well so it’s important to maintain commitment to good business practices and to have a growth mindset.
Failing to follow the system
Why are you buying a franchise? Because there is a brand, a business model, operations processes in place, a marketing strategy, training and development.
So why would you choose to do things your way?
It is following the system that has created success for franchisees already in the network.
Every franchise has its own level of flexibility on the rules, so it’s important to understand the compliance standards of the business you are buying.
Avoid failing in your franchise by understanding how to prepare for success.