A Certain Trait Franchisors and Franchisees Can Share

by Ed Teixeira

Read about a trait that both franchisors and franchisees can share.

There is one trait that some franchisors and franchisees share and it’s not a positive one. It’s a case of being undercapitalized and not being able to do the things that will lead to success. Although there are situations where a new franchisor or franchisee is able to overcome a lack of working capital, this is usually the exception and not the rule. There is a similarity to this situation that is common to both parties, and it has to do with the start-up phase.

The Franchisor Situation:

In the case of a new franchisor the problem is often caused by spending the majority of their franchising capital on constructing and launching the new franchise program without the existing human resources, marketing programs or added capital needed to recruit and support new franchisees. As a result the new franchisor is ready to go but lacks the resources to grow and administer their franchise program. There are franchisors that are able to overcome this problem and grow their franchise network as a result of hard work and creativity.  However, in most cases the result is a stagnant franchise system that fails to grow.

Suggestions for New Franchisors:

• Select the most competent and reasonably priced consultant and attorney for constructing the new franchise. Don’t be impressed by the sizzle. The most important components of a new franchise are the franchise documents, operations manual and consulting services. The total cost for this can range in cost from $40,000 to $100,000. If the cost is on the high end it should be because the franchise is complex not because the consulting company claims to be the best at what they do. You could be paying for a top heavy consulting staff and for the firms advertising and marketing costs. A competent and highly experienced franchise attorney is as important as the franchise consultant.
• Tailor your franchise development strategy to your resources. A franchise launch can be started close to home where the cost to recruit qualified prospects and supporting them can be done by using current staff. After the first 5 or so franchisees are on board franchise development can branch out.
• Consider investing in modest franchise marketing materials. More and more franchisors provide their franchise recruiting materials on line. This environmentally friendly process and can save thousands of dollars in materials and printing costs.

Suggestions for New Franchisees:

• After identifying the most attractive franchise opportunities that match your business and financial profile be sure to identify the franchise start-up investment. Recognize that Item 7 in the Franchise Disclosure Document represents an estimate of costs and the additional capital line is for three months.
• Speak to as many franchisees as possible in order to identify their experience regarding the franchise investment and how long it took them to reach break even.
• Do not invest all of your available capital in the franchise start-up phase. Chances are you’ll need more capital once you’re up and running. If you exhaust your initial working capital and don’t have an added source of capital you will find yourself in trouble unless your franchise has an extraordinary start.
• Ask any franchise expert about why franchisees fail and being undercapitalized will be at or near the top of the list.

Franchisors and franchisees that lack sufficient working capital to launch their franchise could be headed for trouble. With a limited amount of capital the opportunity to overcome unforeseen events could be fatal to the franchise operation. If there are doubts then either wait until you have more capital or walk away. 

© 2011 FranchiseKnowHow, LLC

Ed Teixeira is the President of FranchiseKnowHow, LLC. He can be reached at franchiseknowhow@gmail.com