One of the Biggest Mistakes a Startup Franchisor Can Make
by Ed Teixeira
Business owners considering franchising their company need to avoid
making a critical mistake that can hurt new franchise growth.
Franchising an existing business requires sufficient investment capital to
successfully navigate through the various stages of franchise growth. It has
been my experience that when new franchisors fail, the reasons run the gamut
from a flawed franchise program, to a lack of franchisor competency, to a lack
of capital. Itís the lack of capital that Iíll focus on, because Iíve heard it
mentioned more frequently than any other reason. Since most companies that
decide to franchise are small businesses, most have a limited amount of capital
to invest in a new franchise program.
Part of the problem is that constructing the components of a franchise program
can be the easiest part of the franchising process and in many cases the most
costly. Consider it akin to building a hotel (weíll put the importance of the
location aside) where the real challenge is operating the hotel and securing
lodgers, diners and functions. Using a franchise analogy, the real challenge is
being able to successfully recruit qualified franchisee candidates and sell
The best constructed franchise program that represents an investment of
$100,000 is of little value unless the franchise system is successfully launched
and developed. However, all too often the primary effort and the majority of
available investment capital are applied to building the franchise program. When
itís time to develop the franchise program, there isnít enough capital to add
staff and to prospect for candidates.
There are three key stages to creating and operating a new franchise company:
Stage 1: Constructing the franchise program
Stage 2: Developing and marketing the new franchise
Stage 3: Administering the franchise program that includes
servicing and supporting franchisees.
Business owners need to be wary of spending too much capital on Stage 1 that
there is not a sufficient amount for Stage 2. The answer is not to cut corners
when building the program but rather to be cautious when spending your capital.
After taking this approach, if there is insufficient capital remaining, to
launch and develop the new franchise, then the best decision might be to wait
until you have accumulated enough to successfully launch the program.
How to Avoid the Big Mistake:
- Identify the total amount of capital that can be invested in
Stages 1 and 2
- Try to minimize costs in Stage 1. Spending $100,000 to
franchise the business and not have a minimum of $50,000 or more
to launch the new franchise in year one will lead to failure.
- Either have someone in the company in place or the resources
to hire a person who can help with the franchise sales process.
Donít rely on brokers to launch the franchise unless you want to
give up a good amount of initial fees. Plus youíll still have to
manage the majority of the franchise sales activities.
- Carefully shop around for the right franchise consultant and
attorney to construct the program. The cost to franchise
including the legal fees can range from $40,000 to $100,000 or
more. In some cases youíre paying more for reputation and
appearance, rather than substance. Note: If the franchise is a
food concept that is somewhat complex, the cost to franchise may
be on the high end.
- Be wary of pricy feasibility studies. A feasibility study,
that can ascertain whether a business could be successfully
franchised, which includes financial franchise models, shouldnít
cost more than $5,000.
- Be wary of costly market development plans that represent a
binder full of contact information for franchise ad portals and
brokers. The same information can be easily gathered from the
- Make sure the consultant includes the forms and franchise
development tools youíll need to launch your franchise program.
- Donít expect high priced operations manuals and expensive
franchise sales brochures to sell franchises.
- Before committing to franchising the business, itís
important to determine the approximate costs to launch the new
franchise in addition to focusing on the cost to build the
program. This includes the advertising and marketing costs
for recruiting qualified candidates and administering the
Business owners considering franchising their business often underestimate
the overall cost to build, and launch a new franchise, but rather focus on the
first stage of the franchising process. Identify the total costs of
franchising and be sure that there is ample capital to build and launch the
© 2013 FranchiseKnowHow, LLC
Ed Teixeira is the President of FranchiseKnowHow, LLC. He can be reached at
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