Costly Franchisor Mistakes to Avoid

Costly Franchisor Mistakes to Avoid

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I have seen hundreds of businesses succeed at franchising and a number fail. While the paths taken by the successful are many and varied, those to franchise failure are surprisingly predictable.

Failure, like success, does not happen by mistake. It happens because people made the wrong choices. The mistakes we make in business are often avoidable. Here are six common mistakes companies make when seeking to franchise their business.

1. Ready, Fire, Aim

Probably the single greatest mistake made by budding franchisors is a lack of planning. Too often, new franchisors ask their lawyers to draft their legal documents without giving a thought to the importance of the business decisions that these contain.

When structuring a franchise offer, small mistakes can get replicated over and over until they cause major failures. A 1% mistake on a royalty, multiplied over 100 franchisees, can literally cost a franchisor tens of millions of rands. That is often the difference between success and failure.

2. Me, Too

Closely related to planning is the ‘follow the leader’ mentality often found in franchising. Many entrepreneurs will come to franchising after observing successful competitors, believing that success depends on duplicating their strategy. This could not be further from the truth. When McDonald’s first arrived on the scene, it was promptly greeted by dozens of knock-off concepts that have long since met their makers.

Too often, we see franchisors whose business strategy is to duplicate the franchise disclosure document of their largest and most successful franchisor, only to find years later that the strategy failed miserably. The key to success can lie in differentiation.

But even if its competitor did a good job of planning, the new franchisor’s circumstances are different.

A different business model.
Different management team. Different philosophy. Different market. Different investment requirement. Different training requirements. And if nothing else, different competitors.

Copying the industry leader’s strategy is not a strategy. It is often a recipe for disaster.

3. Do-It-(Wrong)-Yourself

New franchisors typically have one thing in common: they are already running a successful business. The entrepreneurs who founded these businesses are resourceful, self-confident, and accustomed to substituting hard work for growth capital. Odds are good that they built their first business without relying on outside help, so why would franchising be any different?

Franchising requires the franchisor to have expertise in a number of areas, including strategic planning, organisational development, financial analysis, legal documentation, operations documentation, training, marketing and sales. We often see new franchisors relying on their internal resources and a local lawyer who does not specialise in franchising, only to repeat mistakes that were readily avoidable. Trial-and-error is an expensive way to learn franchising.

4. Failure to Budget

Franchising can be a low cost means of achieving rapid growth. But it is not a ‘no cost’ means of growth.

To start, new franchisors need to budget for the development of strategic plans, operations manuals and marketing materials. They need to anticipate legal fees for the development of contracts, disclosure documents and legal registrations. They are likely to incur accounting, printing, travel and other expenses. And they will need to invest in marketing and business development.

For franchisors who want to sell only a franchise or two and just get their feet wet, the investment in franchising can be minimal. But for a franchisor with aggressive growth goals, these costs can be significant.

5. Can’t Say ‘No’

One of the biggest mistakes in franchising can happen soon after the initiation of sales efforts. After spending up to R800 000 on the development of a new franchise programme, franchisors generally come out of the gates ready to sell. And when a marginal candidate offers a cheque for R140 000, the first instinct may be to recapture capital invested in franchising.

But these first few franchise sales can end up being the ones they regret in the future. Nothing is more important to franchise success than the quality of its franchisees. The best franchisors start with high standards knowing that these franchisees will be brand ambassadors for years to come.

6. Focus

Perhaps the most ironic mistake made by new franchisors is that they do not fully understand the most important principle of franchising: make your franchisees successful and you will succeed.

Successful franchisees pay more royalties, require less support, provide great public relations, buy more franchises for themselves and promote the brand to new franchisees. Failing franchisees cost more, pay less and make it harder to sell and grow.

Mark Siebert
As a franchise consultant since 1985, Mark Siebert founded the iFranchise Group, a franchise consulting firm, in 1999. During his career, Mark has personally assisted more than 30 Fortune 1000 companies and over 200 startup franchisors. He regularly conducts workshops and seminars on franchising around the world. For more than a decade, Mark also has been actively involved in assisting U.S. franchisors in expanding abroad. In 2001, he co-founded Franchise Investors Inc., an investment firm specializing in franchise companies. He's on the board of directors of the American Association of Franchisees and Dealers and the board of advisors to Connections for Community Ownership, which encourages minority business and job development through franchising.