Franchising can be a great tool for growing your business and can also be rewarding profit-wise. But it can be a double-edged sword.
If done poorly, franchising can cause your business more harm than good. Here are some of the most common mistakes many new franchisors make and how to avoid them.
1. Using somebody else's franchise agreement
Using some other company’s franchise agreement is like wearing somebody else’s wedding dress to your own wedding. For such a milestone event, you would most likely have your dress or suit made to your own specifications. Yet many new franchisors copy their franchise agreements from other businesses that are already franchising because they want to save money, don’t have time to wait for a custom-made agreement or believe a franchise agreement is just like any other franchise agreement.
However, the so-called savings and time are short-lived. In the long run, these companies run into more problems and end up paying more for those mistakes. Even if a company has a successful franchise program, that program may not necessarily be applicable to your business. Your franchise agreement should be tailor-fit to your unique business. It should come after a careful and thorough strategic and financial planning process built around your company’s unique business strengths and development goals.
2. Charging too high a franchise fee
Some new franchisors charge a high franchise fee from the start because they want to make money on the relationship right away. If you look at the cash flow coming to you from franchising, you will see that the franchise fee is only a small part of what you will make as a franchisor. The major income will come from the ongoing fees, such as royalties and sale of merchandise/supplies, services, etc. If the franchise fee is just a small portion of what you will make, it doesn’t make sense to charge an exorbitant amount that will only discourage the entry of new franchisees, when it isn’t your main source of revenue anyway.
It makes more sense to charge a reasonable franchise fee to bring franchisees into the system, then make your money on the ongoing royalties and sale of supplies/merchandise. Better to treat your franchise fee as a cost recovery fee; charge enough to recover your expenses in setting up the new franchisee: marketing, site assistance, applicant evaluation, training, etc., but don’t charge way beyond those.
3. Not having a win-win perspective
Franchising should be a win-win arrangement. Franchisors and franchisees should profit from the relationship. Some franchisors have a short-sighted view and design their financial package by only taking into account how much money they will make and not how profitable the business will be for their franchisees. They do this by charging fees—royalties, franchise fee, product mark-ups—that result in very little profit for their franchisees. Another way this happens is when they window-dress their franchise offering by projecting higher-than-normal sales in order to get a higher return for their franchisees on paper.
This short-sighted approach will backfire in the end. When franchisees begin to feel the pinch of very little or no profits, the franchisors will regret not taking care of their franchisees from the very start.
4. Taking too long to franchise
The general thinking regarding the right time to franchise your business is that you should wait for about two to three years or have opened two to three branches. This is more of a guide than a rule. If you are the first-to-market with a unique product or service, then waiting too long might give others time to copy your idea. Sometimes, more aggressive copycats will even surpass you, making you lose the prime mover advantage you had in the beginning.
In cases such as these, it would be better to launch and learn, meaning that you should franchise your business quickly to maintain your market lead, then perfect your business as you go along. The Generics Pharmacy only had one branch when they started franchising. But if they waited too long to franchise, then many other brands would have joined the market and negated their early entry into the market. Their quick-to-franchise strategy worked. TGP grew to 500 branches in its first three years. By the time other generic drugstores had entered franchising, TGP already owned many of the coveted locations. They already had top-of-mind brand status.
5. Saying "yes" to applicants they should say "no" to
Some franchisors are so excited to grant franchises that they compromise their selection criteria and grant franchises to applicants they are not entirely convinced would make good franchisees in the first place. The short-term gains—franchise fee, sales revenue, royalties—will later be nullified by the long-term losses—inability to collect receivables, lost sales to customers of the brand, negative image from closure of the branch, etc. These are the top mistakes new franchisors make but they are not the only ones.
The best way to avoid these mistakes is to enlist the help of experienced professionals with multi-disciplinary expertise in franchise strategy, finance, legal, operations and marketing to help you do things right the first time. In franchising, there might not be a second chance to fix these mistakes. Because other investors are involved (i.e. franchisees) there is very little room for error on the franchisor’s part.
Francorp is the world’s leader in franchising. Take a free franchisability test (http://francorp.com.ph/are-you-franchisable/) and learn whether your business is ready to grow through franchising. For more information on franchising, contact Francorp Philippines at (02) 638-3149, (+63917) 835.55.30, email firstname.lastname@example.org, or visit francorp.com.ph.
Noel Siggaoat is the Managing Director of Francorp Philippines. An MBA graduate of the Carnegie Mellon University of Pennsylvania and a Certified Franchise Executive (CFE), he heads the firm's consultancy practice. Noel has a diverse background in IT, finance, retailing, and franchising and has worked with companies here and abroad. He is a weekend athlete who has completed marathons, a half-Ironman, and other endurance events