Five Commandments for New Franchisors
One of the most common — and most insightful — questions that we hear from new franchisors is “What are the most common mistakes made by new franchisors?” It is a great question. So, not long ago we sat down and wrote our top 5 New Franchisor Commandments. They are:
1. Know Thyself. Business people have a wide range of potentially useful skill sets. Some are great numbers people. Others have a knack for marketing. Still others are tremendously effective communicators or great salespeople. But, it is rare to find one person possesses all the skills necessary to make a new franchisor successful. That’s OK. New franchisors typically have a small core group of people running the business. And, it may be that within that core group they have people that can provide all the functions necessary to make the franchise business work (although they may need some guidance on the franchise business model). But, if they don’t, they should find someone who is capable and hire them.
2. Know Thy Concept. This is so fundamental that it is shocking that it could be an issue. But, it is truly amazing the number of business people who want to become new franchisors who have not really honed and perfected their business concept. To create a successful franchise system you need to be able to deliver consistent products and/or services to consumers and create a memorable enough experience that customers will associate your brand with a unique and positive experience. Still, many budding franchisors haven’t really identified what makes their concept unique, or why customers patronize the business, or how to consistently replicate the business from one unit to the next.
3. Do the Math. Every business should have a business plan. And, part of every business plan should be an analysis of how and when the business will start to make a profit. Once a company decides that they want to start franchising, they often think that they are already successful and that they already know all there is to know about their business — and they might. But, the day that they start franchising is the day that they start operating a completely new business. If that new business isn’t likely to make money, there’s no reason to start it. While there are a number of factors that can go into the break even analysis, at core, it is simply a question of “At what point will revenues exceed costs?” In franchising, this means determining how much each franchised outlet will add to the franchisor’s revenue stream and how many outlets the company will need to have operating to cover costs. Once that is determined, the company must take a hard look at whether the number of outlets is attainable with the capital available.
4. Don’t Out-kick Your Coverage. Business people want to succeed. Now. That is a worthwhile goal, but it is important to be realistic about your expansion plans. Too many franchisors want to be the next “Hot Concept” and be a national brand overnight. They often fail to recognize that aggressive expansion costs money and requires people to do site selection, training, marketing, sales, etc. If too many franchisees are brought in faster than the fracnhisor is capable of supporting, they all — franchisor included — risk failure. Rapid expansion isn’t a problem — if you properly plan for it.
5. Choose Your (First) Franchisees Wisely. It is usually hard to sell the first franchise. Because of that, franchisors are always eager to get the first prospect signed and into the system. Then, they figure, a flood of prospects will follow. Maybe. But, in their eagerness, they often end up accepting franchisees in the system that never should have been in it at all. It may be because the franchisee did not have sufficient assets to properly support the business, or they did not have the proper business acumen or personality. This is the most frequently violated New Franchisor Commandment. That is because it is so difficult to avoid. Franchisors often do not know who their ideal franchisee is until they have already seen a number of them fail. But, there are too many new franchisors who do not pay much attention to the prospect’s attributes beyond their ability to produce a check, a pulse and a mildly foggy mirror.