Franchising: Avoiding The Pitfalls

Starting a franchise is often considered less risky than launching your own business from scratch. However, that doesn't mean you're guaranteed success.

There are plenty of potential pitfalls involved in getting a franchise off the ground, and even when your business is well established you could experience unforeseen problems. Funding is one of the common reasons franchise businesses run into trouble. Running a franchise involves a high level of financial commitment. You need to pay an initial fee to the franchisor as well as ongoing costs, and on top of those you need enough working capital to keep the business running while you build up revenue. Much of the money needed to launch a franchise business can be borrowed from a bank, providing your credit worthiness and financial history is deemed acceptable, but you will be expected to provide between 30% and 50% of the funding yourself – and regardless of the line of business you are in, that will represent a substantial commitment.

Therefore, you shouldn’t consider franchising unless you are sure you have access to sufficient funds to get your business off the ground and keep it running smoothly.

Another reason franchises run into trouble is disagreement between the franchisee and franchisor. A franchise agreement is, in theory, mutually beneficial; the franchisee gets to work with an established brand and proven business model, and the franchisor makes money from the success of the business. However, sometimes the franchisee feels he or she isn’t getting the necessary support from the franchise head office in the form of training or marketing, making it difficult to achieve the necessary sales to make the business a success. Or they might feel they’ve been misled over the profitability of the business model. Equally, the franchisor might feel the fault lies with the individual business owner.

If you’re going into franchising, you should protect yourself as much as possible against this type of dispute. The best way of doing this is to ensure the contract is watertight – you need to know exactly what you will be getting from the franchisor in return for your fees. Then, if problems arise and you don’t get what you’ve been promised, you have recourse to legal action.

An additional way to address some of the uncertainty is to get real-life examples of sales figures from existing franchisees rather than projections. That way you’ll have a better chance of assessing the true value of the franchise opportunity.

Again, make sure the contract provides clarity regarding financial expectations. Look out for disclaimers that act as a get-out clause for the franchisor if your business doesn’t return a certain level of sales. If you need help, enlist the services of a business lawyer specialising in franchises.

While it’s essential that your franchise contract is clear and free of loopholes, it’s important to choose a reputable franchisor in the first place to minimise any problems you might have. So do your homework – check the internet and gather all the information about a franchisor before entering into an agreement. Speak to their current franchisees – ask for their opinions on the value of service they receive and whether promises have been fulfilled. It’s worth checking to see if the franchisor is a member of the British Franchise Association.