Common mistakes franchisors can make that you should look out for
The chief reason for prospective franchisees buying into an established chain is that they’re not by themselves. Buyers are placing full trust in the franchisor – so there are some important factors to carefully evaluate when choosing a franchisor. Like any entrepreneur, they can make fatal mistakes.
Here are some of the most common mistakes that can bring down franchisors:
- Many franchisors fail because they grossly underestimate how much capital it takes to get to royalty self-sufficiency. Franchisees should closely question the franchisor on its assets and liabilities – or risk finding everything is being done on the cheap.
- They franchise before they have perfected and proven the concept. Franchisees should check 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.
- They 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.
- The franchisor does not conduct a full site evaluation. It is critical that franchisors ensure that site assessments are done properly for each new outlet to prevent franchise failure due to a bad location.
- 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 new franchisee training. Initial training should be linked to the operations manual and should cover all aspects of the franchise business, including general business training.
- The franchisor is less involved in adding value to the franchisee and ensuring his/her profitability, but rather concentrating only on policing franchisee conduct.
- 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.
Franchisees may not be able to stop franchisors making these mistakes – but they can avoid the mistake of joining a bad network. Franchising will always reward a business that is unique, profitable, enjoyable, difficult for competitors to copy and offers franchise candidates an acceptable and predictable return over the long term.