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. It’s the lack of capital that I’ll focus on, because I’ve 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 (we’ll 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 franchises.

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 it’s time to develop the franchise program, there isn’t 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 opportunity

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. Don’t rely on brokers to launch the franchise unless you want to give up a good amount of initial fees. Plus you’ll 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 you’re 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, shouldn’t 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 Internet.
• Make sure the consultant includes the forms and franchise development tools you’ll need to launch your franchise program.
• Don’t expect high priced operations manuals and expensive franchise sales brochures to sell franchises.
• Before committing to franchising the business, it’s 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 franchising process.

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 franchise.

© 2013 FranchiseKnowHow, LLC

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