Developing a Franchise System

by Simon Lord

last updated 19/08/2019

Five major myths for intending franchisors

by Simon Lord

last updated 19/08/2019

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

A horrendously high percentage of business buyers fail to do proper due diligence before launching a new venture. Sadly, the same applies to many new franchisors. All too often, they have preconceptions about what franchising a business involves and, unless they take advice from a good advisor with experience of several different franchise systems, they’re likely to run into trouble –­ and take their unfortunate franchisees with them. 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 that is replicable in other markets. You then need to invest in feasibility studies, structural analysis, pilot operations, protection of intellectual property, legal and financial advice, development of manuals and training programmes, attracting and assessing candidate – all this and more before you grant your first franchise. The upfront fee you charge 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.

2 Franchisees do all the hard work

Wrong again. 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 fee that they receive from franchisees. That means providing leadership, research, product development, marketing, support, training, mentoring and much more.

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 generally lower than for independent small businesses, 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 research, the right advice and the right model, they are only going to create a whole lot of new problems for themselves.

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

 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? 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

 No you don’t. You’re an entrepreneur, you challenge the way things are done, you’re constantly pushing for change, you’re willing to take risks and fail. Do you really want to try to direct 20 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.

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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