Before buying a franchise, check carefully for these five danger signals, says Meredeth S. Jones
According to the SBA (Small Business Association), 50% of all independently owned small businesses fail within the first five-years of operations while only 5% of all franchise locations fail.
Instead of tackling the obvious 50%, let’s focus on the 5%. Although there is obviously less risk in buying a franchise, here are the top five reasons why a franchise may not succeed and what you need to consider before buying a franchise.
1. Not the right fit. You may not be the right fit for the type of franchise you are considering. Do you have the skills it takes to run the type of franchise you are considering? In the service industry, such as a pest control or home services repair franchise, you are going to be responsible for selling your business on a local level.
Are you comfortable with selling and marketing yourself? In a child enrichment franchise, you will be working with children and parents every day. Do you have the disposition to work with children? Consider the industry and make sure you have the skills and personality for the business.
2. Poor Franchisor support. Lack of operational and marketing support from the Franchisor. Is the Franchisor properly training their Franchisees? Often times, the initial training program may be strong, but once the business opens, there must be on-going operational support from a corporate level. What about on-going marketing support?
Franchisors should have a dedicated team to help market your business prior to opening and to support you with ideas and materials after opening for local level marketing efforts.
After all, you are buying into a franchise which should have tried & true systems in place to help make you successful. Talk to existing franchisees that have been open at least one or more years and find out how they are being supported.
3. Lack of funds. Just having the capital to meet a Franchisor’s minimum financial requirements are not going to be enough. Think about how you are going to pay the bills before you start making a profit.
If you do not have the additional funds immediately available, building in additional working capital into your business loan is a safe way to ensure you can sustain your new business, financially.
4. Poor location. Is the brand’s success contingent upon an A+ location in the market? Understanding the franchise’s site criteria for optimal success is key. Not only where you need to be, but what percentage of your sales the occupancy cost will be. A rule of thumb in franchising, a safe percentage is anywhere from 8-10%.
5. The Franchise model is flawed. Sometimes a brand is good “on paper” only. This can be for a number of reasons. Lack of experience, complicated operations, lacking in the systems & processes needed to support franchisees, not enough staff at the corporate level, etc.
A solid way to avoid some of these pitfalls is simply doing your due diligence on a brand. Don’t just take the Franchisor’s word for how great they are, go out and talk to as many Franchisees as you can. Not just by phone, but in person.
ABOUT THE AUTHOR
Meredeth S. Jones is the Founder of two chicks consulting, a boutique consulting firm with over 20 years combined franchise sales & development change agent expertise improving and streamlining the franchise sales/development process for Franchisor’s across multiple industries to include restaurant & bar, retail, health & wellness, and childcare. Increasing overall store count and Franchisor profitability. Due to Meredeth’s diverse franchise sales & operations experience, she is uniquely positioned to also provide consulting services to Entrepreneurs looking to own their own business. https://www.linkedin.com/in/meredethsjones/