5 mistakes to avoid when starting a franchise
Franchising is the perfect bridge between mentorship and entrepreneurship, providing franchisees with a tried and tested business model and solid operational systems.
While following the franchisor’s instructions will certainly improve processes, it is no guarantee for success. Buying a franchisee will provide you with a streamlined structure to initiate operation, but the elements that make a business successful, such as managing finances, staff and generating clientele, is up to you.
Make sure you are abreast of the current market and learn from the errors that others in your position have made before you.
Here’s our top five common mistakes that all prospective entrepreneurs should avoid when starting a business.
1. Failing to carefully review the disclosure document and franchisee agreement
Both the franchise agreement and disclosure document provide valuable information that will greatly assist a prospective franchisee in making a well-informed purchase.
Specifically, the disclosure document will outline important confidential and relevant information about the franchisor, the arrangement being offered and the requirements of both parties involved.
Information relating to the franchisor’s business experience, past criminal, civil or insolvency proceedings, ownership, site selection policy, payment costs and timings, and the obligations of both the franchisee and franchisor will be found here.
All franchise business must provide accurate disclosure documents as outlined in the Franchise Code of Conduct, which is governed and enforced by the ACCC.
While the disclosure document describes the relationship between the franchisor and franchisee, the franchisee agreement is the binding contract that legally governs that relationship.
The franchise agreement explains the expectations the franchisor has for the franchisee, providing a detailed explanation of the contract.
It will cover the guidelines that the franchisee must legally follow in operating the business, proprietary statements that outline marketing and advertising procedures and types and time-frames relating to ongoing site maintenance.
It is imperative that franchisees have a comprehensive understanding of this document, and it is strongly recommended that you have a qualified franchise attorney review the agreement prior to signing.
2. Following passion only
From a personal viewpoint, it’s always a great idea to invest in a business that you are passionate and interested in, however the most important aspect of any venture should be the business’ profitability expectations.
Try not to be blinded by a particular product or service that you love, as others may have had a different experience or may not even fully-understand what the product is.
The most profitable franchisees are often found in industries that are not glamorous, however enjoy a clearly defined consumer demand, such as home-cleaning and garden maintenance brands.
3. Forgetting to seek advice from a franchise account
Many franchisees are first-time business owners and as a result, the weight of expansive financial documents can be overwhelming.
Subsequently, one common mistake that new franchisees make is miscalculating the upfront and ongoing costs of the business.
While it seem like a flat fee that your personal savings could easily cover, factors such as operating costs, wages, franchise and royalty fees can add up, causing an imbalance between projected costs and actualised costs.
Consult a franchise-specific accountant and develop a comprehensive cost-coverage plan, encompassing all potential costs involved in the initial start-up of the business, followed by any rent, or fee increases as the business grows.
Franchisees should weigh these costs against the personal time and energy investment that new business owners commit, and be sure to factor in a personal wage to ensure the business’ profitability results are not compromised.
4. Failing to consult existing franchisees
During your due diligence process, it’s important to gain an accurate cross-section of the business as a whole, this includes speaking with current and former franchisees.
Raynia Theodore, Principal at MST Lawyers says “other franchisees can be an invaluable source of information about the franchisor, its business and its systems”.
Throughout your franchise journey, you should consult with your network regularly, that way you gain an understanding of how the entire business is operating, what trends other franchisees have identified and how best to optimise your processes.
5. Forgetting to plan for your exit
While all franchisees are encouraged to view the venture as a long-term commitment, having a back-up plan or exit strategy allows you to better prepare should things go wrong.
Consider the impact that business failure would have on your personal finances, as well as when lease termination, non-renewal of contracts etc.
In the future, you may want to sell the business, so keeping on top of all possible legislative, lease documentation and contract obligations will help you prepare for this.
Franchising is a model of small business that allows entrepreneurs to benefit from a set of streamlined processes that have been developed over years of operation, however it is a never a certain recipe for success.
Franchisees must perform accurate due diligence, be dedicated to improving their operation and willing to learn from others.
The better prepared you are, the greater your chances of financial success in the franchise sector.