Want to Be the Next Subway? Avoid These Costly Franchisor Mistakes
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I've seen hundreds of businesses succeed at franchising. I've also seen a number fail. While the paths taken by the successful are many and varied, the paths to franchise failure are surprisingly predictable.
Failure, like success, does not happen by mistake. It happens because people made the wrong choices. Unfortunately 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, we find that new franchisors start out by asking their lawyers to draft their franchise legal documents without giving a thought to the importance of the business decisions that these documents contain.
Franchising is like business on steroids. Small mistakes get replicated over and over until they cause major failures. A one percent mistake on a royalty -- multiplied over 100 franchisees -- can literally cost a franchisor tens of millions of dollars. That is often the difference between success and failure.
There are literally dozens of these make-or-break decisions that an entrepreneur needs to make when structuring a franchise offer.
2. Me, Too
Closely related to the issue of planning is the "follow the leader" mentality that often finds its way into the franchising process. 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.
Few of us are old enough to remember that 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. Why did Burger King succeed? It said, "Have it your way," and dared to be different.
Too often, we see franchisors whose business strategy seems to be 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 -- and there is no guarantee that it did -- 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.
New franchisors typically have one thing in common: They are already running a successful business. The entrepreneurs who founded these businesses are almost universally 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?
The business of franchising requires the franchisor to have or acquire expertise in a number of areas in which they probably have limited experience. These, to name a few, may include strategic planning, organizational development, financial analysis, franchise legal documentation, operations documentation, training, franchise marketing, and franchise sales. We often see new franchisors relying on their internal resources and a local lawyer who does not specialize 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 for your business. But it is not a "no cost" means of growth.
To start franchising, new franchisors usually need to budget time and resources for the development of strategic plans, operations manuals and marketing materials. They need to anticipate legal fees associated with the development of their contracts, disclosure documents and state registrations. They are likely to have accounting, printing, travel and other associated expenses. And they will need to invest in franchise marketing and in building the franchise organization.
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.
Related: How to Franchise Your Business
5. Can't Say 'No'
One of the biggest mistakes in franchising can happen soon after the franchisor initiates its franchise sales efforts. After spending $50,000 to $200,000 on the development of a new franchise program, franchisors generally come out of the gates ready to sell. And when a marginal candidate comes to the door waving a check for $35,000, the first instinct may be to recapture some of the 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 -- and to a brand -- than the quality of its franchisees.
The best franchisors start with high standards from the outset knowing that these franchisees will be brand ambassadors for years to come.
Perhaps the most ironic mistake made by new franchisors is that they do not fully understand the single most important tenet of franchising: Make your franchisees successful and you will succeed as a franchisor.
Young franchisors may focus on how fast they can grow the business, when they should be focusing on making their franchisees successful.
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.
Franchising's greatest strength -- the ability to grow largely unconstrained by the constant demand for investment capital -- can also be its greatest weakness. Sell faster than your ability to support your franchisees, and you're likely to fail as a franchisor. Focus on their success, and odds are good that success will follow.