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4 franchise fails; What not to do when buying a franchise

Nick Hall

For new business owners, franchising can be a great way to kickstart operations, but like all ventures, there is no certainty for success. Pitfalls do exist, so it’s important to do your research and avoid franchise fails.

The model relies on replication and consistency; however, as all small business owners will tell you, running a franchise is an individual experience.

No two businesses are the same. Whether it be demographics, location, supply chain or staff, each franchisee will encounter their own specific challenges and opportunities.

If you are considering buying into a franchise, you need be diligent. Here’s four things you must avoid in your franchise business.

1. Open in the wrong location

The old adage suggests location is key, and when it comes to franchising, this is especially true.

Making sure you launch your franchise business in a location that is not only easy to get to, but also in an area free from established competitors and where demand is strong.

For example, it would be pointless to launch an adventure gym franchise in a town with a high-population of elderly residents.

Peter Buckingham, managing director of territory planning and advisory business Spectrum Analysis advocates for extensive research into a proposed location.

“In a consumer business it’s important to look at population figures with some adjustments for various socio-economics,” Buckingham said.

2. Not staying on top of cashflow

For any business owner, cashflow is the most important metric to measure profitability and sustainability.

Put simply, cashflow is the amount of money coming in and out of your business. It is the lifeblood of your business and the pulse the keeps the operation running.

Before you start trading, it is pivotal that you establish whether the business is financially viable. You can do this with a cashflow forecast.

A cashflow forecast comprises of three main elements; revenue, expenses and closing cash position.

Maria Robinson, from Sequel CFO said an accurate cashflow forecast is essential to both the research process and during operation.

“It should be used when conducting your due diligence to decide whether a business opportunity is right for you, and it should be used while operating your business,” she said.

“You should revisit your cashflow each month and update projects for the prior month to actuals. This then makes your cashflow forecast a living tool to track your performance against plans.”

Not maintaining accurate and up to date cashflow records is just one of the franchise fails that must be avoided by new franchisees.

3. Set unrealistic expectations

It is very rare for a business to achieve immediate success. While franchising offers the potential to launch with streamlined systems developed over years of operation, it is still unlikely that franchisee will turn a large profit within the first year.

For this reason, franchisees must remember to set realistic goals and manage their expectations.

This isn’t to say that you can’t be optimistic. All new business owners should have the drive to develop their outlet into the most profitable and successful venture possible.

Always fact-check and cross reference any information handed to you, particularly with regard to the profitability of other franchise outlets within the network.

As mentioned previously, demographics, location, wage costs and supply chain can all have an effect on operation, be sure to ask questions and seek advice.

4. Only rely the franchisor’s word

In everyday life, you wouldn’t rely on someone else to tell you everything you need to know, and franchising is no different.

Franchisors have a vested interest in the success of their franchisees, and as a result, they are generally forthcoming with information.

As a franchisee it is essential that you qualify any claims that are made. This will ultimately help you to make a more informed decision.

Esther Colman, HR Dept franchisee said that all prospective franchisee should be prepared to dig deeper.

“How you analyse that information and your ability to ask pertinent questions will determine whether you make a truly informed decision,” she said.

The Sydney franchisee revealed her top four tips for prospective franchisees are; to take your time, ask lots of questions, assess the risk vs returns and make an informed decision – don’t be afraid to walk away.

By following these rules, Colman believes you can avoid franchise fails and get off on the right foot.

The impact of franchise fails

Like any opportunity, if you enter into a franchise thinking it will be an easy ride, you are in for a shock.

Franchising is hard work, particularly in the early days. Getting it right from day one allows you to focus on the important things, like generating leads, attracting customers and refining operations.

Keep one eye on your cashflow and one eye on your future, and don’t be afraid to consult your franchisor should you have any queries.