10 ways to avoid being a franchise failure
Buying a franchise is a huge step to take, so you want to get it right.
When you buy a franchise you are taking steps into business ownership without the challenge of standing alone.
The franchisor’s system and support team is behind you. The franchisor is providing franchisees with the means to do business.
You are buying into a business with a brand name, an existing system of processes, marketing campaigns and training programs.
In return as a franchisee you need to show hard work, application, a commitment to the brand and its processes, and an appreciation that the business is yours to turn into a success or a failure.
However it’s easy to make assumptions about what you will get from the franchisor, and what your responsibilities are to the brand. It will help to understand just what the franchisor expects from you, so here we consider what you can question before you buy, to ensure you have the best chance of success.
Look at the franchise model
1. Is this a proven franchise model?
It’s exciting to be involved in a brand new project that will take the world by storm. Of course even McDonald’s started out as a small business and if you’re a big risk taker, then brand new concepts will appeal – and there’s certainly money to be made if the business takes off.
But if you’re more cautious by nature, and lots of franchisees are, then selecting a mature and established brand makes more sense.
When it is your money being invested and your future at risk, you need to be sure the franchise model will work in tough times, in different areas, and when you are ready to sell in three or five years’ time.
2. Is your franchisor committed to your future?
Although your business is your responsibility, you want to invest in a franchise model that is go ahead.
It is the franchisor’s responsibility to look ahead, to take on the research and development role, to source new product or services in line with market trends, regulation changes, consumer preferences.
One clear reason to buy into a franchise system is to gain competitive advantages offered by an engaged franchisor who shows vision, provides direction and ensures there is support for the franchisees.
3. Is your franchisor financial?
There are a number of ways your franchisor can make money: selling franchises, selling products to franchisees and royalty fees.
If the network is growing fast, it is worth considering if the franchisor has the finances and resources to support such expansion.
Signs that franchisors might be finding it hard to stay on top of the finances include lessened communication with franchisees, not returning phone calls or emails, staff redundancies, and a drop in advertising and marketing budgets.
4. Are franchisees happy and successful?
Every franchise model will have some franchisees that have not achieved their goals. What is important to find out is the failure rate across the network, and what has caused them.
Check out the percentage of franchisees who their agreements; find out how many of the franchise outlets up for sale are distress sales.
Speak to existing and former franchisees to get the best responses.
Are franchisees happy with their return on investment? One of the best signs of a strong franchise network is a high percentage of profitable franchisees.
Would the franchisees buy this franchise again? Not all franchise systems allow for multi-unit franchise ownership but if your chosen franchise does, it’s a good sign to see lots of franchisees investing in their second and third outlets.
5. What are the downsides about the business?
You can find out from franchisees what they find challenging in their relationships with the franchisor and support team. You can also discover more about how any disputes are handled – and whether there are many disputes.
Use the internet to find out what customers think about the franchise. You might not agree with them, and neither might the franchisor, but you have some points you can raise and see how the franchisor handles complaints.
The franchise buyer questions
6. Can you conform?
Franchise systems are built on compliance and conformity.
If going into business is an opportunity for you to ‘do your own thing’, perhaps a start-up is a better option. If you join a franchise you need to ensure you comply with the rules and the processes that have made the franchise a success for existing franchisees.
Yes, you will be your own business owner but your fellow franchisees will be relying on you to follow the rules so you will also need to be a team player.
Being your own boss in a franchise really means being responsible for your own business, not running your way.
6. Are you passionate about the franchise?
When you sign up to a franchise agreement you are committing to a legal contract.
That means you need to be passionate about the business because you have legal commitments.
Find a franchisee and spend some time with them working in the business, getting to understand the day-to-day reality of operating the franchise before you invest.
7. Is your family supportive?
Will your family and friends support you in this move? You are likely to be working long hour, be driven by the business and have to miss key family events as a new franchisee, so will your personal network of family and friends understand this and back you up?
Go into your franchise clear about what and how you want to achieve your goals.
8. What happens if you fail?
Will you be able to take on the demands of the role of franchisee? What would happen if the business doesn’t work out - can you and your family survive failure?
It's wise not to take on a business initiative that could result in marriage break-ups or financial hardship if it fails.
9. Do you have the money to buy a franchise?
Doing a proper budget is a must-do before you buy a franchise. Remember that on top of any franchise fees to be paid upfront will be legal, accounting and any business registration or licensing costs; there may be extra costs for equipment that you need to consider.
Ensure you will have sufficient working capital to keep yourself afloat during the first few months while you are build your business.
10. Do your research
Be thorough in researching the franchise model, the costs, the franchisor, the specific location, and the industry.
It’s essential to undertake your own research (due diligence) so that you are not relying completely on information provided by the franchisor.
Speak to franchisees.
Seek legal and accounting advice from experts who are experienced in the franchising industry.
Take your time and be as objective as you can about what happens next.