After more than 35 years working in the franchise sector, I’ve seen both franchisors and franchisees make mistakes that have cost them (or each other) time and money.
Some of those mistakes have had relatively minor consequences, and their respective businesses have continued with little disruption. However some mistakes, when combined with others, can lead to devastating outcomes, and others by themselves alone may also lead to catastrophe.
In particular, the most crucial mistakes – particularly for franchisees – are made even before they join a franchise. The mistakes they make in their pre-purchase evaluation of the franchise and preparation to launch into business for themselves are the easiest to make, but also the easiest to avoid.
Becoming a franchisee should never be a race, and people who take the time to undertake proper due diligence first will always make more-informed choices. So here’s my take on the Top 10 Mistakes that potential and new franchisees make.
- Not speaking to current and former franchisees
It seems so blindingly obvious yet it’s surprising that some potential franchisees are so excited about the idea of becoming their own boss that they don’t talk to current and former franchisees first.
Current franchisees can be easily identified via the “Locations” section of a franchisor’s website, or via the list provided in the franchise disclosure document which the franchisor will provide when a candidate expresses serious interest in a franchise.
The disclosure document will also include a list of ex-franchisees who have exited the franchise in the last three financial years (unless they have opted not to be included in the list), and these are definitely worth speaking with. They might have had a great experience and moved-on to better things, or they could have had a terrible experience so maybe you should consider something else.
The best question to ask any current or ex-franchisee is this:
“So if you had your time over again, would you still invest in this franchise?”
- Not spending time in the business
The best way to understand what it’s like running a franchise is to spend time in one (or more) before committing to ownership. Most franchisors will be happy to arrange “discovery days” for franchisees to spend time in an outlet to help them understand what their working days might look like in future.
Be prepared to ask for more than one discovery day, and ask for these across a number of different locations. Remember that your experience with a brand as a customer is totally different when you are on the other side of the shop counter.
A great example is coffee culture. People who love hanging-out in coffee shops and dream of owning one might find that the reality of being on the other side of the shop counter is far more intense than what they see as a customer.
- Not reading your franchise agreement
Let’s admit it, franchise agreements are boring, but if you don’t read and understand what you’re signing-up for, you could be in for some nasty shocks in future. Of course you may not understand it all, but that’s OK. This is why you engage the services of competent legal advisors (see my next point).
A franchise agreement is like the ultimate pre-nuptial agreement. It contemplates things that neither party might consider will ever occur during the relationship, but in case they do, the agreement determines how those things are dealt with. It won’t be an exciting read, but it is definitely a good use of your time.
- Not getting advice from competent and experienced advisors
You wouldn’t go to a general practitioner (GP) doctor for something as specialised as brain surgery, nor should you expect that lawyer who did your will, property conveyancing or other legal matter will be an expert in franchising. So instead of paying for their time while they learn about franchising, just go to an expert franchising lawyer to start with (the same applies for accountants and business advisors too).
Professionals with demonstrated experience are well-known in the franchise community and are members of the Franchise Council of Australia. Yes, their hourly rate might be dearer, but if they can help you understand the franchise agreement in half the time, you’re better-off.
- Not writing a business plan
Whether you’re buying a franchise or starting an independent small business you need a plan. No ifs, no buts. Your franchisor might (but in reality should) insist on a business plan as a condition of granting you the franchise. No business plan = no franchise.
A business plan is where you seriously consider the detail of how the business runs, what products or services it sells, how much it will sell them for, to whom, how often, and at what cost. Outsourcing a business plan to your accountant doesn’t make you accountable for the performance of that plan. If you’re banking on achieving a certain level of sales per day, week or month, then your plan will also include information about how you will achieve that in terms of marketing activity and promotions. A failure to plan is a plan to fail.
- Not understanding financial KPI’s
Financial KPI’s (key performance indicators) are the numbers that tell you if your business is on track for success, or heading for disaster. If you don’t know what your KPI’s should be, go back and look at your business plan, and ask your franchisor and advisors as to what these should be.
The most common KPI’s for a business include things like:
- Average sale transaction value;
- Number of sales per day;
- Number of items per sale;
- Gross margin (ie. the amount from each sale, after the cost of goods sold, that contributes towards the fixed costs of the business and your profit;
- Labour costs as a percentage of sales.
The list of KPI’s can be as long as you like, but if you can’t measure any of these, you can’t manage them. And if you can’t manage your KPI’s, you’ll probably go broke before you even know it.
- Not following the system
Franchisors go to a lot of trouble to develop a way of doing business (ie. the system) which includes their induction training for new franchisees, and standard processes for almost every element of the business.
So it’s surprising that when some people join a franchise they think they can just do things their own way and ignore all the established knowledge and experience that has gone into make the system what it is.
Yes, everyone will have ideas on what can be done better, and that’s healthy in a franchise network when it is channelled properly through the Franchise Advisory Council or via proactive collaboration with the franchisor. But when a franchisee decides to randomly start doing things their own way, chances are they’ll eventually run into trouble and wished they’d just followed the system to start with.
- Not recognising, and acting quickly enough when things go off course
Sometimes stuff goes wrong in business. New competitors entice your customers away. The economy struggles and discretionary spending drops. Good staff are hard to find so you take anyone you can get. Whatever it is that’s causing your business to drift off course, fix it fast before it lasts.
So how do you identify drift? Well that’s covered by your KPI’s. While KPI performance may vary across different days in the week, if there is a trending decline then you need to act on it before it gets worse, or even turns into a death spiral. And if you need guidance on how to overcome a decline, reach out to your franchisor and your fellow franchisees. You’re all in this together, so everyone has an interest in supporting one another.
- Not listening to, or seeking the advice and guidance of your franchisor
At some point as a franchisee you might think that “I’ve got this. I really know what I’m doing now and I don’t need input from the franchisor any more”.
Wrong. I sometimes refer to this as teenager syndrome, as any parent with teenage kids knows exactly what I’m talking about. Your confidence is based on your performance in your business only. The franchisor has a helicopter view of the entire network, and can see what’s working and not working across the all the outlets. Your confidence could be premature and a problem that the rest of the network has successfully dealt with could be around the corner and ready to bowl you over if you ignore the advice and guidance of the franchisor.
- Not provisioning for statutory obligations (tax, super, etc) and reinvestment capital
It sounds so obvious and yet people in business for themselves for the first time make the foolish mistake of thinking that sales equals profits, and therefore all of the money in their business bank account can be raided as if it were their own private piggy bank.
Of course, when the BAS needs to be paid at the end of the month or quarter and the money isn’t there, it’s always someone else’s fault. Likewise when you have to pay out departing staff for accumulated holiday pay and entitlements, or when the landlord tells you that your shop needs to be repainted or remodelled in some way in order to qualify for a new lease at the end of their first term.
So yes, it’s important to consider what the future capital and cashflow needs of the business will be and to keep money aside to cover these. If you don’t, you’ll quickly find that even a profitable business can be shut down by creditors if it doesn’t have the cash on hand to pay its bills as and when they fall due.
So there’s my list of the 10 most common mistakes made by potential and new franchisees. Take these to heart, and if you can avoid these 10 mistakes, you are on your way to running a successful franchise.
About the author:
Jason Gehrke MBA CFE, Director, Franchise Advisory Centre
Jason has more than 35 years’ experience in franchisee, franchisor, advisor and educator roles.
He teaches franchising best practice to franchise leaders around the world, and writes extensively on the sector. He has worked with hundreds of franchise brands and seen many common (and avoidable) mistakes made by both franchisors and franchisees.
