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FIVE MAJOR MYTHS
FOR INTENDING FRANCHISORS

by Simon Lord,
last updated 26/10/2011

Franchising can be a great way to expand your business – but you have to know what you’re getting into.

If you’ve ever talked about franchising your business, you’ll soon find yourself having conversations with people who have strong opinions about the subject – both good and bad. Unless you are talking to someone with first-hand experience of several different franchise systems, you’re likely to come across a lot of half-truths with people repeating what thev’re heard or read elsewhere. Here are five of the most dangerous myths for new franchisors.

1. Franchising is a licence to print money.

Wrong – at least initially. Before franchising, you have to have developed a successful business and created a brand, products or services and delivery systems that are replicable in other markets. You then need to invest in all sorts of ways – feasibility studies, structural analysis, pilot operations, protection of intellectual property, legal and financial advice, development of manuals and training programmes and recruitment marketing, to name but some – before you grant your first franchise. The cost you can charge as an upfront fee will not recoup all that investment, and the revenue you gain from your first franchisee will not cover your ongoing support costs. It is only as your franchise grows and others come on board that you will start to see a return on all your hard work.

2. Once it’s established, franchisees do all the hard work.

Wrong again, I’m afraid. Yes, once you reach the established stage a good franchise can be extremely profitable for the franchisor, but it won’t qualify as passive income – there’s still a lot of work for the franchisor to do. The franchisees may be serving the customers, but the franchisor needs to justify every royalty cheque that they receive from franchisees. That means providing leadership, research, product development, marketing, support, training, mentoring, communication and much more. You might note that this requires an additional set of skills to those used to build the original business, so that probably means employing appropriate staff – new staff.

3. Franchise failure rates are low, so franchising is a great way for my business to grow.

This is a dangerous half-truth. Franchisee failure rates are low – generally, much lower than for independent small businesses, although the statistics are never entirely clear on how much safer. But the failure rate of franchisors is almost certainly higher than the failure rate of businesses as a whole. This is because, unless people go into franchising with the right attitude, the right research and the right advice, they are only going to create a whole lot of new problems for themselves.

4. I know this business better than anyone else does so I can franchise it myself.

Plenty of chefs make great hamburgers but they didn’t create McDonald’s. A franchise is about systems, consistency and standards. You might have those in your business but how are you going to communicate them to others? How are you going to structure your business so that franchisees have a territory that is large enough to support them without being so large that they cannot service it properly and leave gaps for competitors? How will you ensure that the fees franchisees pay are big enough to fund the services they need while allowing them a good return on investment? Can you be sure you have the right controls in place to retain the integrity of the brand while giving franchisees the ability to exploit it on a local basis? I’d bet that most of those failed franchises mentioned above skimped on getting more than basic legal advice when they started to franchise. Yes, you might know your business better than anyone else – but do you know the business of franchising?

5. I want franchisees who are just like me.

Oh, boy. Let’s look at it this way. You have built a business from scratch. You have entrepreneurial flair, the drive to challenge the way things are done, a desire always to do better, a willingness to take risks and fail. Do you really want to try to direct 20 or 40 or 100 franchisees just like you? Or do you want people who are prepared to take the systems you have built; to apply them diligently in their own area and devote their energies to what works rather than play with what doesn’t? You need to select franchisees who are willing to work within a system and who are prepared to listen to advice. Of course they need that entrepreneurial streak to make the most of the opportunity, but too much of it and you’ll have constant battles. As Michael Gerber said, ‘Entrepreneurs do not buy business opportunities, they create them.’ That means that a true entrepreneur will never be fulfilled working within a system. However, an apprentice entrepreneur may find a franchise a fantastic place to learn about business, for the benefit of franchisor and franchisee alike.

Click here to read 5 More Myths, including why you don’t want people just like your employees either.

This article was first published in NZ Business magazine

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