8 Mistakes Franchise Entrepreneurs Make (And How To Avoid Them)
Becoming a franchise entrepreneur is a highly-appealing prospect for many people. The idea that you can simply slot yourself into an existing business model and become a boss overnight is crazy.
But, of course, franchise bosses make mistakes. Not all franchises are successful and many crash and burn, leaving franchisees in debt.
The purpose of this guide is to run through the primary mistakes franchise entrepreneurs make and how to avoid them. Reading this article, you should better understand how mistakes are made and what you need to do to avoid them.
No Long-Term Commitment
The first mistake many franchise entrepreneurs make is lack of long-term commitment. They think setting up a franchise business is the ultimate short-cut and that it doesn’t take time.
Unfortunately, that’s not how the real world works. Most franchises of the same brand in the same city have wildly different performances. Newer outlets require a long run-in before they start competing with the older ones everyone already knows about and trusts.
You can avoid this mistake by viewing franchises as a 5 to 10-year project. Taking this approach increases their profitability over time and ensures your mind is in the right place for the long haul. If you need guidance for the first few months, the franchisor should be able to provide that for you.
Over leveraging Debt
Overleveraging debt is another mistake many new franchise owners make. Many see these businesses as similar to property, able to continue appreciating and generating an income stream forever.
But, of course, that’s not how things work out in reality. Taking on too much debt is dangerous at the start because there is no guarantee sales will rise. This applies to both new and existing locations you might want to buy.
Lenders don’t take the business’s eventual profits into consideration. Instead, they expect you to pay them on time every month in the amount they request from you.
You can avoid this issue by being more conservative with your borrowing and putting in more of your personal money. If you can find specific programs designed to support franchisees, that’s even better. These often have more favorable terms than those set by regular banks and credit unions.
If you’re unsure how much to borrow, speak to a franchise consultant. These professionals can provide guidance on things like debt-to-income ratios and likely cash flow.
Ignoring Marketing
A lot of franchisees ignore marketing obligations, which is another mistake. They assume everything will get done by the brand head office.
Unfortunately, this line of thinking is mistaken. While HQs for major brands do invest significantly in marketing, local operations also have to reach out to customers.
Furthermore, some franchises skimp on the brand’s marketing guidelines, creating further confusion. They depart from recognized logos and perform advertising strategies that just don’t work.
The way to avoid this is to follow the franchisor’s marketing plan. They’ve often done all the research so all you need to do is put it into action.
The marketing plan should tell you:
- How to reach out on social media
- Where to concentrate local marketing efforts
- Which community events you should join or sponsor
Employee Management Failure
Employee management failure is the most common mistake franchise owners make. They don’t train or hire them properly, leading to high turnover and dreadful customer service.
Employee management is critical for franchises because it is their major point of differentiation. If one location has a better service than another, more people are likely to want to use it.
Dealing with employee management issues is often a long and protracted process. However, you can fix most issues by:
- Improving working conditions and timetabling arrangements
- Training employees to interact with customers at the standards set by the brand or higher
- Implementing competitive wages to attract the right people
- Setting a cultural example
Choosing A Poor Location
Choosing a poor location for your franchise is another big mistake. Picking a location because of low rent or personal convenience isn’t a good idea. Even if you are representing a famous brand, you may still experience lack of footfall.
The best way to get around this is to work with a real estate expert and the franchisor to settle on a location. These professionals often have vast experience under their belts and have a pretty clear idea for where you should go.
They can also tell you if there are problems or issues with your existing proposals. Being too far from other services or setting up in a location people don’t expect are common challenges.
Choosing The Wrong Franchisor
Selecting the wrong franchisor can also get you into trouble. Many entrepreneurs pick franchises because they have a passion for them. But this strategy is incorrect if all you want is a profitable business.
Ideally, you should choose the franchise that you can manage that offers the highest return. You don’t want something that gets out of control or is outside of your comfort zone.
To avoid this mistake, ensure your franchise skills match the business. Check you understand local market needs.
If you don’t speak to a consultant or advisor. Make sure you understand the business you’re getting yourself into.
Underestimating Costs
Another mistake franchisees make is underestimating the costs. They overlook the fact they have to pay royalties and marketing fees, believing their profits will be higher than they really are.
Avoiding this mistake requires building a detailed financial plan showing expected cash flow and revenue. You need to learn how these relate to your costs, and how much you should sell to break even.
A lot of franchises fail because of under-capitalization. When this happens, they have to be bought out, causing lost equity in fees.
Failing To Do Sufficient Research
Lastly, many franchises fail because they don’t do sufficient research. Entrepreneurs don’t investigate the brand they’re supposed to be promoting.
You can avoid this problem by exploring all the metrics relating to the business, including the ones most people ignore, like fees and franchisee turnover. These provide more context and let you know whether the franchise business is worth setting up.