The Top 5 Mistakes Franchisees Make and How to Avoid ThemLearning from the mistakes of others is far less painful than making your own.
You’ve been bitten by the entrepreneurial bug, done your initial research and are now ready to begin your journey as a franchisee. But no matter how much business savvy you bring to the table, there is always a learning curve when launching a new business — and coming in under a franchise system is no exception.
Luckily, millions of entrepreneurs have taken the franchise route, so you’re in good company. Instead of taking a trial-by-fire approach to learning those hard lessons, learn from the mistakes of other franchisees and save yourself a lot of time, money and heartache along the way.
To learn more about the most common mistakes new franchisees make — and how to avoid them in your business — NCR Silver spoke with Steve Murphy, president of franchising at Winmark Corporation, which owns five franchised retail brands with a collective 800 franchisees and 1,200 locations throughout the U.S. and Canada. Here are the top five pitfalls he sees these business owners make.
In his experience, Murphy said the most common mistake new franchisees make is not starting with enough capital.
“Too often, franchisees don’t capitalize the business as they said they would when going through the initial process,” he said. “Either they have the money, but they don’t put it in; they get cold feet and don’t want to put that much at risk; or they never got the money they said they were going to get — so they go into business and are undercapitalized from day one,” he said.
When doing your initial research, he advised planning to invest the high end of what the franchise estimates your startup costs to be. That way, you’re prepared in case it takes more than the lower or average estimate to get your business off the ground. Also confirm you have enough assets at your disposal and make sure you’re willing to actually put that money into the business. Otherwise, you could put your company in financial straits before it even gets off the ground.
Not sticking to the franchise model
The next common mistake is abandoning the model they agreed to follow when buying the franchise. Frequently, franchisees get so excited to have their own business that they start doing things their way instead of executing the roadmap put in place by the franchisor, Murphy said.
The advantage of owning a franchise is that the much of the initial legwork is taken care of for you by the franchisor. You get to start with an established brand, a built-in customer base and systems in place to help your business be a success. But this model may not be a good fit for everyone.
“If you’re a true entrepreneur who wants to make your own rules, create your own systems, truly be your own boss and not have any standards or anything apply — that’s the advantage of doing something on your own,” explained Murphy. “The reason you buy into a franchise is because that model has worked and has been successful — so don’t deviate. You’re committed to the model. That’s what you’re buying into, so stick to that model.”
Not participating in the system
In those first few years as a franchisee, taking advantage of the support resources provided by your franchisor is easy. But after a year or two, many franchisees fall off the bandwagon and quit attending conferences, joining corporate update calls or participating in field visits.
“That support system can help keep you between the white lines and make sure that you’re successful. Leaning on that support system — using their expertise and their guidance to help you be successful — is critical,” said Murphy.
What’s more, when you don’t take advantage of those opportunities from your franchisor, you’re not getting as much return on your investment.
“You’re paying a royalty in year one, and you’re paying a royalty in year 20. Make sure that in year 20 you’re still getting the value for the dollars that you’re paying into the franchise system,” he said.
Adding new locations too soon
Many franchisees also try to grow too fast by adding new units before they’re ready. When a unit shows early signs of success, it’s exciting for both the franchisee and the franchisor, said Murphy. But don’t jump the gun on a second or third unit too quickly.
“They get into a situation where they’re undercapitalized or have bit off more than they can chew. They take what was one very successful unit, and now they’ve got two very mediocre units,” he said.
Be patient and make sure you really get your arms around that first franchise unit before you try to manage multiple locations, he advised. That way, you know exactly what it will take to grow into additional units and how to make each of them successful.
Being too hands-off
According to Murphy, the final top mistake new franchisees make is not being involved enough in their business on a day-to-day basis. When you buy into a franchise system, you can’t just hire a manager, put them to work and then go on vacation or stop showing up everyday, assuming that the business will run itself.
“Just because you’ve got a successful model doesn’t mean a franchise is not going to take work.” -Steve Murphy
“Just because you’ve got a successful model doesn’t mean a franchise is not going to take work. It’s still a startup business. You’ve got to be hands-on and really drive the business,” he explained. “As the owner, you’re the one with the most vested interest in making sure it works, so you just can’t leave it in the hands of an employee to do that for you.”
Remember, franchising is a great route when you want to hedge your bets by taking advantage of a proven system, but it’s still your business. Even though you’re licensing the brand name, system and support, you as the franchisee are still the owner, and how you manage your business ultimately determines its success or failure.