The 5 biggest franchisee mistakes that lead to failure--and how to avoid them
Be Your Own Boss, Fall 1999
Virtually all the business media have been guilty of glamorizing the positive side of owning a franchise. Unfortunately, the negative aspects are sometimes either glossed over or simply ignored. As a result, many people go into business with blinders on . . . and end up well on their way to failure before they've even begun.
In my 18-year history of franchise marketing, I've identified the kind of people who do or don't become successful franchisees. I've also identified many common misconceptions that may ultimately lead to business failure.
For starters, most people are used to working an 8-to-5 job, with a "boss" directing them. When you're in business for yourself, you must have the discipline to work independently. You can never say "Gee, I don't have anything scheduled this morning, so I'll sleep in." You must maintain the same work schedule or the same number of hours virtually every day. If you don't have anything scheduled, you should read educational materials to further your business knowledge and capabilities.
In addition, prospective franchisees who come from a corporate background may be used to putting in their eight hours, then putting their work behind them. Many people actually assume that when they own their own business, they'll be able to work less and take more time off for recreation. Unfortunately, the opposite is true. When you run your own business, you usually have to work more hours, not fewer. You have to be willing to put in long hours and, if necessary, work weekends as well. This is especially true in the start-up stage.
Stuart J. Dizak is president of Video Date Services, a 247-unit videotaping service franchise based in Rochester, New York.
Blunder #1: Inadequate Financing
A considerable number of people have unrealistic expectations when it comes to the funds needed to start a business. Our firm, as well as virtually every other franchisor, sends a financial qualification questionnaire with the initial information package. We then review the questionnaire to evaluate the prospective franchisee's financial qualifications prior to sending more detailed information.
Even though our package has a comparatively low cost (less than $22,500), we find 40 percent of those who return the questionnaire are financially unqualified. They often lack the necessary start-up funds and can't come up with adequate financing. Furthermore, a considerable number of the questionnaires indicate the person has virtually no cash or liquid assets. In this case, we respond with a letter explaining they're financially unqualified. Many call us back saying they expect either a bank, the SBA or our firm to provide 100 percent financing.
We don't provide direct financing--even if we did, we wouldn't be able to finance these people. In most instances, neither a bank nor the SBA will provide someone with financing unless that person is investing a significant portion of his or her own funds, boasts a good credit record and has the means to pay back the loan.
Most people wrongly assume the SBA will provide them with 100 percent financing based solely on their good ideas. But if someone has no cash at all, it usually reflects poorly on his or her ability to manage finances--something the SBA takes into consideration.
When prospects do qualify financially, we find they usually finance 50 to 60 percent of the total investment. Most use a home equity loan, as the interest rate is lower and tax deductible. The payments can also be spread over a longer period of time. The remaining prospects get 100 percent of the necessary funds from cash savings, personal credit lines or family loans.
Blunder #2: Lack Of Planning
Another fact rarely considered is that the majority of new businesses fail within a few years. In most cases, business failures are due simply to poor planning or no planning at all. Most people who go into business enter a field related to their current employment or a favorite hobby. They don't do a market study first to see whether the demand for their product or service is growing, declining or stagnating.
They also fail to allot the proper time for administrative tasks. Most new business owners assume the majority of their time will be spend producing and marketing their product or service. Unfortunately, this isn't the case. An inordinate amount of time is spent on administration--talking on the phone, purchasing supplies and equipment, filling out government forms, and taking care of other mundane duties.
Blunder #3: Unrealistic Expectations
Many individuals assume not only that most businesses succeed, but that they're lucrative from the get-go. This is definitely not the case. It usually takes at least a year to develop a profitable business.
We have many individuals who tell us they need to make a minimum of $50,000 the first year. As a general rule, we recommend a first-year goal of earning back your investment. (For us, that's $22,500.) Even then, the money has to be reinvested in the business. In other words, in your first year, you should have other sources of income to live on.
Blunder #4: Inability To Commit
Even though most people would like to start their own business, only a small percentage actually do it. When push comes to shove, most lack the self-confidence to make a decision and act on it. We tell people in this position that in order for their businesses to succeed, they must be able to gather information, weigh the facts and then make a prompt decision.
Blunder #5: Unwillingness To Take Responsibility
A business owner is 100 percent responsible for his or her mistakes. There's always a risk of a business failure or less-than-expected financial return. If that should happen to you, you can't blame it on someone else.
Those who can overcome these obstacles are ideal candidates for business ownership. Many of these qualified people don't make the attempt, however, because they're (understandably) unwilling to give up the security and benefits of their full-time jobs.
My personal recommendation is this: Unless you're currently without a job, you should start a business that can be operated on a part-time basis. Once the business has proved itself and you've made a little money, you can convert it into a full-time operation and quit your job. Not only are the financial risks considerably less, but this allows you to see whether you fit the entrepreneurial mold.
Finally, by far, I've found the single most important factor in determining who succeeds and who doesn't is simply the amount of effort exerted. If you aren't ready and willing to work--and work hard--franchising is probably not for you.
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