Mistakes in franchising

For those who have just begun life as a franchisor, getting to grips with the day-to-day running of a business can involve a fairly steep learning curve. As the franchisor, you’ll typically have responsibility for most of the big decisions made in the company, which means there will be a lot of pressure on you.

But don’t worry, as we’ve compiled this list of common mistakes made by franchisors. Successful franchisors should make every effort to avoid the following.

Top franchisor mistakes

1. Ignoring your franchisees

One of the most common mistakes made by franchisors is ignoring franchisees. As you’re the mastermind behind the entire franchise, having built it up from scratch over the years, it’s all too easy to think of yourself as having all the answers. Sometimes you will.

However, your franchisees are the people working on the frontline, interacting directly with customers and experiencing problems and difficulties that you may not encounter back at HQ. They’ll be able to tell you how well your products or services are received by customers and clients, and whether there are any issues with the supply chain, for example.

Consequently, it's vital you provide your franchisees with a forum in which they can air their grievances and make suggestions. Although they won’t always be right, they will be able to offer unique insights into how the franchise can be improved. By showing them that you care about their concerns and are interested in having their input, you’ll also gain their respect. They’ll be far more likely to support you and be cooperative if they feel they’ve got a voice within the franchise and can have an impact on the business as a whole.

>> Read more:

• Top 10 Mistakes To Avoid When Starting A Franchise
• Top 5 Mistakes To Avoid Making As A Franchisor
• Avoiding franchise failure
• Franchisors: How to Avoid the Pitfalls of Growing Too Fast

2. Taking bad legal advice

Franchising a business can be incredibly complicated, and the systems and legal processes often become more and more convoluted with each stage of the growth process. By the time you're looking at international expansion, you'll be having to deal with a different legal system altogether.

Consequently, it's essential that you take legal guidance from a trusted, reputable and experienced source. Although the legal fees may seem unreasonably high at first, proper legal advice provides the firm foundations on which you’ll build the business. It will also give you the confidence to take the next steps without worrying you’re making mistakes.

3. Not implementing a marketing fee

Marketing costs can become one of the most significant expenditures for franchises looking to grow and expand. If you don't apply a marketing fee – or incorporate it into your general franchise fee – you'll soon find the costs mounting up. When starting out, many franchisors don't take the rising costs of marketing into consideration. This leaves them out of pocket and struggling for options.

Implementing an additional marketing fee once several franchise units are already up and running can be an unpopular decision, as franchisees will feel they’re being hit with hidden costs. Therefore, you should take the time to calculate an appropriate marketing fee before you enlist your first franchisees. It should be high enough that it will cover the cost of significant promotional campaigns over the years, but not so high that prospective franchisees are put off joining your franchise.

4. Operating without sufficient capital reserves

Franchisors need to ensure they’ve got adequate capital reserves to ride out a short period of poor performance, meet growth targets and account for unforeseen circumstances. This is particularly important in the early stages of a franchise set-up, when business can be a lot more volatile and demands for support from franchisees will be more common.

Once you’ve worked out how much you will need to save to feel confident that you can survive any turbulent times, you should defer welcoming your first franchisees until you’ve collected that amount. It’s not worth rushing into business expansion if the company falls at the first hurdle.

5. Not distinguishing franchisees from external outlets

A franchisor is well within their rights to sell products and services to businesses or individuals outside of the franchise agreement. In fact, it’s often a useful additional revenue stream. However, franchisors need to ensure that they’re not selling these goods and services at the same price at which franchisees purchase them. Franchisees often pay a great deal to access them and will feel cheated if they find out that the franchise agreement doesn’t grant them preferential access and rates.

By ensuring you don’t make this mistake, you can generate more money for the business and keep your franchisees happy.

6. Working with the wrong franchisees

They say a franchise is only as strong as its franchisees. This means it's essential for franchisors to carefully consider who they're selecting as franchisees. A franchisee who doesn’t have what it takes can cause irreparable damage to a franchise's brand reputation and result in substantial financial losses.

You’ll need to make sure that successful candidates not only have the hard skills needed to effectively run one of your franchise units, but also the personality to deliver consistently positive results over the contract period. In many cases, franchisor training provides new recruits with the right hard skills and know-how, so it may be the case that all you need to do is find a prospective franchisee with passion, determination and motivation.

7. Not utilising collective purchasing power

Independent businesses may find it hard to source the products they want to sell, as suppliers are often reluctant to deliver small amounts of stock. Franchises, on the other hand, benefit from collective purchasing power. Although a franchise is a collection of independent units, the franchisor should combine their purchasing power to find a good price for all the products they require. This can have a considerable effect on expenditure, allowing each franchise unit – and the franchisor – to make enormous savings.

8. Inadequately testing the business model

Just because a business is profitable and looking to expand doesn’t mean it will make a good franchise. Prospective franchisors need to ensure that their business would be sustainable within the franchise system and that it would sufficiently benefit them and any franchisees.

As a simple initial test, you should ask yourself whether you and your franchisees would be able to achieve a full return on investment within four years. Remember, you must account for franchisees and any employees taking a market-dependent salary. If a return on investment isn’t possible within a reasonable timeframe, it’s highly likely that the business will not succeed as a franchise.

9. Not keeping up with market developments

Even if you have developed a solid business plan and understand how your franchise is going to grow over the next few years, it won’t mean anything unless you keep up with the latest market developments. Franchisors need to maintain a good knowledge of the latest developments regarding relevant technologies, legislation, trends and any competitors.

Without a firm grasp on where your industry is heading as a whole, you won't be able to pilot the franchise through the challenges successfully. Instead, you risk falling behind your competition and losing your customers to businesses that are catering to the latest trends, for example.

10. Being inflexible

Finally, if the business is going to grow, franchisors need to ensure they’re flexible and open to change. Expanding a franchise according to a particular model can cause you to get a little too comfortable, particularly if you notice that your formula so far has been hugely effective. As a result, it can be difficult to know when to change things and when to stick to the original plan.

Franchisors need to be aware of this dilemma and let their franchisees know that they’re open to feedback and fresh ideas. Of course, you’ll need to take the appropriate measures to ensure any new approaches will fit well into the current system and can be implemented across the network.

Conclusion

When you become a franchisor, you’ll be introduced to a huge number of new concepts and working methods. You’ll learn many of these lessons on the job, so you’ll have to be prepared to adapt to tricky situations and think on your feet if you’re going to thrive.

It’s easy to overlook the 10 points listed above, as it’s likely you’ll be preoccupied with the general business of getting your franchise off the ground. However, there’s no need to panic, as they can easily be avoided with a little care, forethought, research and planning.

While no list will compensate for a lack of business acumen, our checklist provides you with the knowledge required to get your franchise off the ground without repeating the same mistakes as other business owners. By just keeping them in mind and referring back to them every so often, you can ensure you become a valuable and respected franchisor. Not only will your franchisees thank you, but your bank will too.

Further reading

To learn more, why not take a look at our article on the top five qualities of a successful franchisor or our thoughts on a strong franchisor-franchisee relationship?