If there’s one thing we hear a lot at America’s Best Franchises, it’s “I wish I’d known THAT before I bought my franchise.”
“THAT” can be critical to success in franchising. There are so many things you need to know to start and run a franchise. Following are the Top 10 mistakes franchisees will make when starting a franchise.
1. Rushing the decision to buy a franchise.
Compare competing brands and don’t get caught up in trendy businesses or brands. Don’t be pressured by a salesperson to make a decision for some arbitrary reason that isn’t important to the BIG picture.
2. Not getting the necessary support from your family.
Owning a franchise is a family decision. Your entire household needs to be on board from day one.
3. Having unrealistic expectations.
Yes, franchise owners benefit from buying a proven model but that doesn’t mean you can’t fail. Validate your decision with RESEARCH. Pay close attention to failure rates. Some franchise systems have failure rates of less than 2% while others might be higher than 50%.
4. Being under capitalized.
Make sure you research Item 5, 6 & 7 of the FDD. Get clear on start-up capital, total investment, royalty fees and advertising fees. Is there an escalator to the royalty fees? Don’t stop there. Ask current franchisees if the numbers were accurate. If not, where did they go wrong?
5. Not having the best source of funding.
There are many options for funding, so make sure you explore them all before landing on one. If you have retirement funds consider using them to finance your franchise, tax free. And take inspiration from TRUMP: The Art of the Deal, which says, “Aim high and then keep pushing and pushing and pushing again until you get what you want.” Ask your franchisor about in-house financing and always push to negotiate your best rate or deal.
If you’re thinking about an SBA loan, understand the risks. SBA loans come with personal guarantees. Default and you could lose your home. Further, once you get an SBA loan, you can’t borrow your way out of being under capitalized. The likelihood of you getting any additional capital is not good. Ask your bank, if need be, if you can get additional bank financing on top of an SBA loan. If not, consider getting 30% to 50% more funding than you think you might need. If it turns out that you don’t need it, you can always pay down your loan early.
6. Not knowing your territory.
Recent history shows the term “exclusive territory” can have many meanings depending on which side you’re on. Find a franchise that has protected territories – exclusive rights to operate in a geographic area. If territories are not protected and even if they are, ask current franchisees about the impact of new units opening up adjacent to their franchise territory.
7. Not understanding your market area.
You own the secrets to your market because you live your life there. You are part of the community on a daily basis and can observe where people shop, traffic patterns, and what retail centers are busy and at what time of day. You also understand the needs of the community and know what services aren’t being provided.
8. Under-budgeting for personal living expenses.
Talk with current franchisees about the point of positive cash flow. Realistically, it could be 6 months to a year before you will be able to take a salary from your franchise. You’ll need to have a financial cushion of 6 months to a year for personal living expenses. Don’t forget unforeseen expenses, i.e. medical, education, and auto expenses.
9. Not putting enough thought into the hiring process.
Turnover is costly. Interview several candidates, do background checks, check references and look for a pattern of consistency. Hire who you want and DO NOT SETTLE.
10. Not accepting that franchising might not be right for you.
Owning a franchise is a risky proposition. If you are not a risk taker, franchising may not be for you. The nature of a true entrepreneur is a person that is willing to risk capital and resources to create personal wealth. If you don’t react to pressure well, you may want to reconsider. Entrepreneurs are survivors. They accept the challenges ahead of them and thrive by learning from their mistakes. If that’s you, we wish you great success!