Common Mistakes Made In The Franchise Business

The concept of a franchise business is founded on the idea of an entrepreneur making minimum mistakes. Letting a franchisor take control of the strategic part of the business and dealing only with the least requirements for operations management is an idea that lures many to the franchise business. Though a lot of franchise businesses are booming in India, a lot are failing too. Let us understand the common mistakes in a franchise business that lead to failure.

Wrong selection:

Again and again, entrepreneurs are warned about choosing a business with only the business in mind but often a franchise is selected for the products or services that it is associated with. The products may be good but it does not ensure profitability. One has to check market demand, competition, business model, franchise support, human resources and investment in order to make the right choice. Most people think that business with the most number of franchises is the best performing one. It is definitely not so because often proximity of franchise outlets leads to loss of business. Sales and revenues of a brand may be high but so may be the involved costs and fees. Even franchises with less number of outlets do well because of larger territories or due to a better business model.

Not taking a lawyer’s help:

In India, there is no clear franchise law the agreements between franchisor and franchisee are based on a number of business laws including the Contract Law. In other countries where there are franchise laws, the franchise disclosure document is supposed to have very specific and clear clauses. It is not so in India and it makes it all the more complicated to understand the implications of the agreement. Taking help from a lawyer will make you understand the weak points of the agreement that may pose a risk to you. Many of the franchises are national as well as international and even individual nationalities are different which leads to complicated legal procedures. It is imperative that you take a lawyer's help to understand the agreement thoroughly before making any decision.

Ignoring existing franchisees’ feedback:

Prospective franchisees are always advised to meet and talk to a number of existing franchisees from different locations. One should also make it a point to talk to those franchisees that do not seem to be doing very well. Some make the mistake of not taking an existing franchisee’s words seriously. It is not the right attitude to think that you can never face a similar problem because you have a lot of experience.

Location:  

For any business, whether it is a franchise or not, location is the ultimate factor for success. Even the most lucrative businesses in the midst of the right market will not perform well if placed in the wrong location. A yoga franchise in the middle of a noisy street or a preschool next to a factory can never be successful. One has to use basic common sense and invest in the right location to ensure adequate footfalls that convert to sales and profitability. This mistake is often made by entrepreneurs that have own space and are willing to use it for their own business.

Inadequate finance:

A businessman ends up with inadequate capital when the investment amount, working capital and cash flows are not worked out accurately. Some people who are new to the business tend to think that they have ideas, experience, and resources to run the business at a cost lower than that projected by the franchisor. Some of them may have overestimated their capacity to mobilize loans from banks or other sources. The cash flow cycles in some businesses are long and this has to be kept in mind while planning the investment required. The investment that is stated by a franchisor is usually more or less accurate and one should be ready with the finance before-hand. It is absolutely necessary to visualize and arrange the finance that will be needed until a business reaches the point of break even.

Insufficient training:

Though one may have enough experience in a particular business, one would need to understand all aspects of the business from the franchisor's perspective and the business format. Franchisors usually have extensive training programs for the entrepreneur and all related human resources but the onus lies on the franchisee to benefit from the training. It is very easy to ignore training schedules in the rush of starting a new business when a hundred things are calling for your attention. Proper training of all employees is extremely important to reduce problems and dispense satisfactory services.

Not adhering to the format:

The essence of any franchise business lies in following its business format. In spite of this, some people think of tweaking the format to their convenience. Generally, franchisors are very strict about adherence to the format and levy penalties but some people find ways to evade it. This eventually results in dissatisfactory services and products leading to a drop in market share. It leads to loss of the value propositions of the franchise and thus loss of brand value.

Believing you are free: 

Many people give up a stable job to start a franchise business thinking that they will have the freedom to make decisions and act as per will. This is a very misleading notion. The franchisor is the main owner of the business who makes all the important decisions and the franchisees have no say in it. Some of the decisions may not agree well with a particular entrepreneur’s business profits or ideals but nothing can be done about it. Starting a business, whether it is a franchise or not, means that you are responsible for the management of the unit and cannot give in to your whims.

Relying too much on a franchisor:

In any franchise business, franchisors give support in the form of training, supplies, and marketing, but it does not mean that a franchisee has no duty towards these functions of the business. A franchisors job is to provide support for the same but the franchisee has to manage the rest.

An unreliable franchisor:      It is important to carry out the background check of a franchisor. Many sources will tell you how many new units of a particular franchise opened but it will be very difficult to find out how many units shut down. There are some franchisors that are actually into the business of reselling a franchise at a coveted location. The franchisors continue to receive franchise fees and royalty fees even if a unit is not making a profit.

Over marketing:  

When a business is just starting up, the operations are not yet streamlined and there might be lingering confusion about roles and responsibilities among the employees. Due to good marketing and high brand value, customers flow in as soon as the unit is open to business. When there are too many customers due to launching offers and management is not prepared to serve them properly, it results in a negative image. Because of this, it is necessary to target only as many customers as is possible at the time of launch.

Some of the above mistakes result in situations which cannot be corrected and lead to major loss of time and money. Mistakes are made by every entrepreneur but some mistakes prove detrimental to the business. It is better to find out and avoid making mistakes which can be easily avoided.