Business failure is rarely sudden. So how can you avoid franchise failure? Here are some tips on what to do before you buy a franchise.

“We’re in trouble.”

“What do you mean?”

“We have no cash, I’ve used up all our credit, I can’t pay wages tomorrow, rent is 3 months overdue, I’m on stop with all our suppliers… we’re in trouble.”

This conversation happened just seven months after Brian opened his franchise. The business started with textbook perfection. Great sales, raving fans, fantastic team, KPIs trending the right way and Brian was enjoying the business.

Happy days… until they weren’t.

In Brian’s case his initial success was built on shaky foundations, and reality slugged him a savage upper cut. The business that took off like a rocket crashed just as quickly, leaving Brian with nothing.

There are many stories like Brian’s. The causes differ. Sometimes it’s location, or product, support of the franchisor, flawed systems, incompetence of the franchisee, killer rent, too low sales, insuffienct working capital… It’s a long list and failure can result from one thing or many things.

From what I’ve seen of business failure, it is rarely sudden. Mostly it’s a slow moving car crash, the result of a hundred little decisions that can often be traced right back to where you are today – investigating a business and thinking about becoming a franchisee.

How do you avoid a fate like Brian’s and the thousand other businesses that fail each year?

The answer is you prepare.

Some would say you can never fully prepare for owning your own business – I kind of agree! There are a lot of things that are out of your control, but there are many more things you can investigate, explore, analyse and research to increase your chances of avoiding a franchise flop.

Here is a checklist of some of the things to investigate and watch out for.

1. What do you know about the franchisor?

Sometimes the dream of owning your own business gets in the way of reality. It is critical to park those shiny, glittery dreams and go into the investigation with your eyes wide-open; park preconceived ideas or hopes and deal with the reality.

Have you thoroughly investigated the franchisor? Do you understand the support it offers, the training, the coaching, product, and marketing? Have you asked existing franchisees their experiences with the franchisor?

The industry you’re entering may be new to you. Have you investigated it? How ‘future proof’ is it? Industry bodies and organisations are a great source of information, have you spoken to them?

How does the product or service sit in the market? Can you see how the offering will evolve over time to meet changes in society? Does the franchisor have a plan and commitment to R&D? Can you commit to working with that product or delivering that service day in and day out for the length of your agreement?

Do you fully understand the location or site where you will operate your business? How well positioned is it? How long is the lease? What is the traffic flow? Are there any plans to change surrounding buildings or infrastructure?

Have you talked to other business owners in your area [franchised and non-franchised]?

2. What do you know about being your own boss?

The security of a franchise group won’t stop you waking up in a cold sweat in the middle of the night because you don’t have the cash to pay wages. A franchisor [most likely] won’t be doing your BAS or hiring your staff. Beyond the product or service there is the reality of operating a business.

What do you know about running a business? Are you realistic about your expertise? Do you know what you don’t know?

The industry or the product you may love, but can you run a business? Finances, making the product or delivering the service, managing cash flow, managing a team, driving sales…  How skilled are you? What areas do you need to develop?

Most new franchisees grossly underestimate the time, attention and energy a business sucks out of them. It is all consuming and it is hard. Do you have the time and attention to devote to getting a business off the ground? Working weekends and at night, needing to devote time to training? Are you fit and healthy, physically and emotionally able to take on the business? Are your family and loved ones prepared for your focus being on the business? Do they support you?

Most franchisees are undercapitalised on opening day, underestimating the amount of money needed to get a business up and running. Do you have solid projections? What if the business kicks off with a slower start than projected?  Do you have enough fat in your budget for unforeseen expenses? Do you have a line of credit if you need it?

3. Check the franchise agreement

It’s dangerous. It continues to surprise me how many franchisees don’t read or understand their disclosure document and their franchise agreement. The disclosure document gives you valuable insight into the company you are about to partner with and the franchise agreement sets out the terms you will operate under. Important!

Have you read and analysed the disclosure document and the franchise agreement until you understand them? Get input from an experienced franchise lawyer who can help you make sense of the legalese and skill you up on what to look for.

It’s useful to use the agreement to test scenarios; for example, if I don’t pay on time what happens? If I’m not getting the support I need, what do I do?

Are there other agreements you need to enter into as part of operating your business? If so do you fully understand your commitments?

4. Who will be your support team?

None of us can do everything ourselves and you will need a team of people with their relevant skills and expertise. Do you have an experienced and skilled accountant, lawyer and bookkeeper? Will they anticipate issues and offer guidance?

Consider what other support roles you will need. How will you find them and ensure they have the skills you need?

Initially, you will be reliant on the franchisor’s support:

• Can you work confidently with them?
• Do you understand the support on offer?
• Is there additional help available to you if you need it?
• Do you understand exactly what the franchisor expects of you?
• Are you aligned to the direction of the franchisor?

Even a rigorous investigation process doesn’t guarantee success. A lot can go wrong. Owning a business can bring you the highest of highs and lowest of lows. Your job in these early stages of exploring a franchise is to do what Brian unfortunately didn’t, make sure a low won’t wipe you out.