Underestimating costs is just one of the ways you create risk for your franchise.
4 min read
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Becoming a franchisee has immediate advantages that make it an attractive business opportunity for entrepreneurs — established brand/reputation, tried tested and true templates to follow, franchise support services and a pre-existing customer base are just a few of the benefits.
While these are critical components to the success of any business, franchises run a risk of depending heavily on these factors to be successful. The following five ways contribute to a mindset that can cause a franchisee to cut corners within their franchise, hurting their business in the process.
1. Underestimating start-up costs
Ensure that you’re covered from a finance perspective. If you’re borrowing to finance your franchise, account for costs like legal fees, rent, payroll, utilities and debt repayment. Also, factor in the length of time it will take to generate your own working capital to cover business operations. The general recommendation is to plan for a year when determining your borrowing needs. Ask for enough funds to cover the above plus operating expenses for a year as a minimum. On average, it can take a business upwards of one year before you earn a steady stream of profits. Ensuring that you have the capital to meet all cash flow for operations allows you to focus on learning the business well and navigating the ups and downs of entrepreneurship without worrying about being able to meet your obligations.
Related: What Price Franchising?
2. Not utilizing the franchise support system
Starting a new business is an overwhelming and stressful endeavour, especially for someone who doesn’t have business experience. Franchisees have a luxury that many business owners don’t: access to a franchisor who has created an ecosystem of knowledge to support its franchisees. This is an invaluable tool for franchisees that shouldn’t be underestimated or underutilized. The reality is that at some point, a founder or other franchisee has run into the same problem you may be facing and a possible solution may already exist that you can leverage quickly. Why not tap into a resource like this?
3. Underestimating the importance of reviewing your financials
Assuming that your business will be immediately or quickly profitable is an assumption that carries great risk for a franchise owner. While it is possible, it shouldn’t be expected. A highly recommended practice for franchisees is to ensure that you have a proper financial reporting framework setup where you are reviewing revenue monthly and annually, evaluating profits and operating expenses. In doing so, you learn the trends of your business location and can develop strategies to adapt to when variables change within your financial reports due to business operations. Creating a financial reporting framework can include adding an accounting system to your resources at start-up, or hiring an accountant to ensure that your tools are able to extract the information required to share and evaluate.
4. Underspending on your marketing campaigns
Yes, the franchisee has immediate brand recognition and a pre-existing customer base — but your franchise needs to build up rapport and recognition locally, too. Wherever you choose to locate your franchise, you will meet competition from other businesses that have been successful and others who have established deep roots in the community. A franchise should go above and beyond making their contribution to the corporate franchise marketing fund and ensure that a secondary budget is created to target local customers specifically.
5. Not preparing a business plan
The franchisor covers a great deal of the setup and operation structure for its franchisees, but underestimating the value of a customized business plan that is specific to your needs and that of your community is a great risk. A business plan provides a roadmap to success and clear and succinct information on the critical factors of success. It is also a useful and often required tool for financial and operational expansion.
A typical business plan includes an executive summary, market analysis, management structure, description of product or service, marketing and sales plan, financial projections, funding request and a general appendix.
Opening a franchise is a great opportunity for an entrepreneur to get into business and build up on an already successful and reputable brand. Take careful consideration in how much you plan to go above and beyond with your franchise to ensure its success by treating this business the same way you would if you were building from the ground up. In doing so, your business will only come out stronger and wiser.