What are the common pitfalls when assessing franchise opportunities?

As someone who has an entrepreneurial streak, you might have thought that franchising might be the best way to expand and grow your existing business, or you’ve considered franchising opportunities to invest in. While some of the key features of a franchise are such that a franchise is built on a profitable and proven business model, there are some common pitfalls to avoid when considering a franchise opportunity. This is why if you’re wondering how to start a franchise while putting your best foot forward and reaping all the rewards that come with it, you need to consider both the advantages and disadvantages of franchising to ensure that you not only avoid these common mistakes to enable you to grow to your full potential.

1.Assuming they’re all the same

The first mistake you might make when starting out in the franchising world is to assume that all franchises are the same. There are many different types of franchises – restaurants, takeaways, pubs, cleaning services, home maintenance services, care services, and so much more. So much so that it’s a misconception to treat them all the same. You might be expecting guaranteed success because it’s simply in the nature of the franchise business to be profitable, but you don’t want to assume that each franchise is the same and so you need to carefully look at all the requirements, figures and numbers, potential challenges, etc. in the franchise agreement as well as speak to existing franchisees and the franchise owner himself to help you get a bigger and better picture of the franchise situation you’ve settled on. 

2.Starting without sufficient capital

Some of the best franchise opportunities are those that set out from the outset what the financial requirements will be, without underestimating the costs involved in the start-up phase, the growth phase, the maturity phase and so on. If you underestimate the investment, and don’t plan for shocks, bumps and unexpected costs along the way, you’re likely to struggle financially in the future, which might be characterised externally by a poor economic climate or other internal business conditions. Always try to find out what the hidden fees are and avoid over-reliance on average income figures. While some franchisees who perform well might be bringing in more revenue to the franchise business, there may be many others who don’t perform as well and this discrepancy can affect the average figures you’re seeing.

3. Weaknesses in the Franchise Agreement

When you’ve identified a franchise business for sale and you’re ready to make the commitment, it’s crucial to examine the franchise agreement with a professional lawyer so that you can avoid any loopholes, inconsistencies, lack of clarity in terms of specifying the roles and responsibilities of both sides to the contract and more. Some franchise agreements are weaker than others. Others are stronger. Sometimes even too strong. This may mean that you may have to deal with troublesome exit clauses (for more on this, see below) or difficulties or lack of clarity when it comes to profit sharing and the payment of royalties. A close and thorough evaluation of the franchise agreement at this stage is not important – it’s crucial. Proper due diligence at this stage is also a must. 

4.Expansion that’s too quick and too broad

Some of the best franchises to own have great locations, a strong customer base, steady revenue stream and more. However, if the franchisor is looking at expanding in different territories or geographical locations, and you want to go along with this, thorough research will be crucial. Choosing poor locations could sound the death knell for a particular franchisee as it might not have a sufficient demographic of the right customers for the business. Similarly, expanding too quickly without the proper preparation could be a challenge as well.  

5.Inadequate screening and training

This one is for the franchisors. When you’re looking for new franchisees, you might think that absolutely anyone and everyone will be well suited to pick up your franchise manual and replicate your business’ success. However, that’s just not the case. Not everyone has the right skills set and experience to bring a franchise to success and this is where adequate screening and vetting are crucial. How many interviews have you held with your potential franchisee? What types of questions did you ask them to determine their potential and abilities? 

6.Lack of support for existing franchisees

Another one for franchisors. It might be easy and tempting to fall into the trap of thinking that existing franchisees that do well don’t need your support. After all, since they seem to be doing so well, they must be doing something right and that something is working for them. However, you shouldn’t underestimate their needs and willingness to grow and expand further, and therefore, delivering value to existing franchisees through ongoing training and support is critical.

7.The profitability question

And speaking of franchisees who do well, it might be tempting to squeeze more from existing franchisees, but you’d be doing them a disservice. After all, there’s a franchise agreement that sets out the royalties that they need to pay and you might be tempted to try and get more revenue out of them, but you should enable them to carry out their work and reap the rewards of it by allowing them to be profitable and to enjoy the fruits of their labour. 

8.Not putting in the right effort

With a franchise, it’s easy to assume that all the hard work has already been done and that you can rest on your laurels without lifting a finger. This is an inaccurate assumption that needs to be addressed as well. Effort is needed at every step of the growth journey and this may mean working long hours in the beginning to see your franchise business take off. 

9.Not protecting your intellectual property sufficiently

As a franchisor, you’ll need to protect your intellectual property sufficiently as well. This may mean trademarks, logos, colours and fonts, marketing materials, vehicle branding, social media posts, email marketing, pamphlets etc. If you don’t take the right measures to protect your intellectual property, you’re essentially diluting the ground for others to step in and take advantage of your hard work. 

10.Checking the exit clauses

Finally, exit clauses. Exit clauses are the clauses in the franchise agreement which specify the terms and conditions under which a franchisee may exit the business at some point in the future. Many exit clauses can be restrictive in terms of not enabling you to contact customers of the franchise, limiting your ability to work in a given area for a period of time, preventing you from owning a similar franchise business in the future etc. This is why checking the exit clauses is vital too. While the franchise relationship is usually intended to be a long-term one, there will come a point when the franchise agreement will reach its expiry date. You need to be prepared for this.

Choose the right franchise opportunity for you

Starting out with a franchise can be extremely exciting. After all, you’re relying on a proven business model to help take you through the next couple of years in your life while giving you an income that you’ve earned through hard work and determination. However, it’s important to go into the franchising relationship with both eyes open and feet firmly planted on the ground to ensure that you avoid some of these common pitfalls.

Looking for a partner in franchising? Then why not approach the best in the industry? Fantastic Services is a well-recognised brand with many opportunities for franchising that will suit your development and business needs. To find out more about our franchising opportunities, simply get in touch!

• Last update: May 25, 2022

Posted in Industry Insights