Canada: The Top Eight Errors Made By Many New Franchisors!

Franchising Bulletin
Last Updated: July 1 2019
Article by Jean H. Gagnon

Different studies (conducted primarily in the U.S.) show that about only 25% of new franchisors are still active 15 years after starting up their franchise.

After examining causes leading to the demise of franchise systems that did not pass the 15-year mark, the following eight factors (or mortal sins) were found to be the most common:

Underfunding or Underinvestment

Starting-up a franchise network requires a fairly significant amount of funding, which many new franchisors greatly underestimate.

Most new franchisors will ask how much it will cost to launch a franchising program, but forget to ask the second, and more important, question of how much time and how many franchisees will be needed for the franchise revenues to exceed the costs and investments required to launch and maintain a solid franchise organization.

Deficiencies in Operations as well as in Franchisee Training and Support

One of the direct consequences of a new franchisor's underinvestment or inexperience is a deficiency in its operations tools as well as in franchisee training and support (especially to new franchisees).

These deficiencies and shortcomings often lead to operational difficulties which, in turn, harm the profitability of franchised businesses (while also negatively affecting the income of the franchisor), which lead to a growing dissatisfaction among the franchisees and increasingly significant difficulties in recruiting new franchisees needed to meet the franchisor's financial objectives.

Need to Quickly Recruit Franchisees to Survive

Another consequence of underfunding or underinvesting by the franchisor is the need to quickly recruit a number of new franchisees in order to generate sufficient revenue to cover expenses.

This often leads to the franchisor not properly selecting its new franchisees, to placing franchised locations in sites or territories that are not really appropriate and, sometimes, to selling profitable business locations too quickly to franchisees.

Over time, these decisions negatively affect the franchisor's working capital, not to mention that they may also quickly lead to legal disputes with franchisees who are not achieving the success they expected or were promised.

Lacking Skills in Franchise Network Management

It cannot be repeated enough: a franchise network cannot be managed in the same way as a branch network.

The sound management of the franchisor-franchisee relationship is both a science and an art that managers of any new franchisor must acquire as soon as (or even before) the franchisor launches its franchise network.

Today, there are several training programs, books and advisors available to assist new franchisors and their managers to acquire these skills. It is also beneficial if a new franchisor ensures that some of the executives it recruits already have the necessary experience and skills to manage a franchise network.

Mistaken Impression of Easy Money

Some entrepreneurs venture into franchising for the wrong reasons, such as the mistaken impression that they will be able to make a nice profit from the up-front fees paid by their new franchisees.

As a result, these kinds of franchisors tend to recruit a maximum number of franchisees before even considering developing training and operations methods and tools without any regard for the financial results of their franchisees.

This phenomenon is especially common in the case of franchises that only require a small investment by the franchisees (such as in the service sector).

These types of networks may experience rapid (even spectacular) initial growth during the first few years, followed by a drop that is just as sharp.

Short-Term Planning

It often takes seven to ten years for new franchisors to recover their initial investments, to become truly profitable and to be able to maintain a steady growth rate for their network.

If the franchisor does not properly plan for the investments, resources and efforts needed to achieve this level of growth, the network could perish before even reaching maturity.

Overestimating the Franchise's Appeal

Future franchisees now have a choice between many franchisors in a large number of sectors and at different levels of investment.

As a result, they are more and more selective and tend to choose a franchise that will allow them to attain their personal goals, such as in terms of career, investment, revenue and, sometimes, quality of life.

The proposed franchise must, therefore, have a certain appeal in respect of these different aspects among a sufficient number of qualified individuals so that the franchisor may achieve its growth targets for the network.

If the proposed franchise is not sufficiently unique, profitable, difficult to reproduce and interesting, it is highly likely that the franchisor will have serious problems to recruit enough new franchisees to sustain, in the medium- and long-term, the growth and longevity of the network.

Inadequate Preparation

Lastly, too many new franchisors begin recruiting franchisees before they are truly ready to start doing so.

All too often, they haven't sufficiently tested their franchise concept in different markets, nor properly developed (and tested) their standards and tools with regard to recruiting and selecting franchisees, training, operations, marketing and development.

In fact, based on my experience, many new franchisors rely on only basic material (such as a website and an attractive brochure) to recruit new franchisees and a well-written contract before taking the leap into franchising.

By circumventing the preparation process required to become a franchisor, they put the horse before the carriage and later find themselves having to put a lot of effort into catching up and making adjustments at the expense of their first franchisees, which jeopardizes their relationship with the franchisees as much as it does to the chances of success of their entire network.

Today everything moves fast and news (the bad as much as the good) travels at the speed of light (such as on social media), so a new franchisor who does not properly prepare before even recruiting its first franchisee, exposes itself to extremely serious risks affecting the very survival of its business.

Franchising is, and remains, an attractive and profitable means of growing and managing a business network, but it requires a high degree of preparation, adequate resources, a particular management style, experienced professional advisors and, not to forget or underestimate, significant investments that must be made long before the network becomes truly profitable for the franchisor.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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