Aspiring franchisee? Avoid these four common mistakes at all costs

New franchisees need to avoid these elements that can hinder the success of their business

If it’s right for you, a franchise - a type of business owned and operated by individuals, but is branded and overseen by a much larger organisation - can be a very lucrative opportunity. You can profit from an already established brand, while still running your own company.

However, investing in a franchise is not a decision to be taken lightly; there are numerous considerations which must be taken into account. However, some elements can sometimes be overlooked, which can hinder the success of a business.

With this in mind, it’s vital that new franchisees are aware of, and know how to avoid, these four common mistakes:

1. Failing to play by the rules
It’s important to remember that, because a franchise is part of a well established brand, owners must stick to company regulations, best practice and models. Indeed, you won’t be able to make instant adjustments to your business, even to appeal to your local clientele.

Changes of any size are always implemented from head office. Failure to comply with the franchisor’s rules might result in a breach notice, whereby you are ordered to comply with the franchisor’s rules or your business might be taken away.

Of course, good franchisors will have clear lines of communication for you to feedback with suggestions, should you have them. Consider speaking with a franchise consultant to make sure you match with a firm that has similar expectations regarding what makes a productive working relationship.

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2. Not doing enough research
Franchises are a major investment and many franchisees go on to set up several branches over many years, so it’s not a decision to make lightly.

Naturally, franchisors have a vested interest in attracting prospective franchisees into the business and will likely emphasise the positive aspects rather than the negative. So it’s important to conduct thorough research yourself.

Fortunately, the internet makes it much easier to carry out your own research. A thorough internet search can enable you to investigate numerous franchise options and determine which is the right one for you.

It would also be beneficial to speak with current franchisees. They will be able to give you some kind of objective take on the franchisor as a business entity, the regulations, investment potential, workload and - perhaps most importantly - whether they enjoy their work.

3. Not understanding oneself
Within the franchising world, there are many options available, so you need to know exactly what you want.

For example, a bricks and mortar franchise is likely to have prescribed opening hours. Does this work for the sort of work-life balance you’re seeking? Or might a mobile franchise be more suitable? These are the kinds of questions you must ask yourself before committing.

Further, do you believe in the product enough to make it work in your location? Would you be happy relocated to a different area to start your franchise? Is this something you are doing purely as an investment? Such considerations will help you narrow down your options, so you can make a more informed choice.

4. Being financially unrealistic
It almost goes without saying, but starting a franchise requires a large initial investment. This can vary from £5,000 to £250,000, depending on the franchise you’re buying into, so make sure you’ve fed this into your financial plan.

Thereafter, you will need to pay various ongoing costs. These may include marketing and service fees, but the most significant cost will likely be rent. To give a real-life example, McDonald’s charges between 12.25 per cent and 21 per cent on net sales in 80 per cent of its UK restaurants - although this number is based on projected profitability.

Ensure the model and costings fit exactly with your expectations and financial capability and you have a comprehensive understanding of the franchise agreement that is being offered.

There are a variety of questions that all prospective franchisees need to work out before starting a new venture. Being thorough, realistic and being the right kind of person will stand you in good stead to make the right call about proceeding and thereafter choosing a business.

After all, if buying into a franchise is the right fit for you, it could be a rewarding business opportunity.

The author
Nic Redfern is financial director for Know Your Money, an independent financial comparison website launched in 2004.

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