Posted on November 13, 2007 by Bryan Nisperos
As with any business venture, you can not always rely on information passed casually between holes at the golf course. While 95 percent of all franchises are successful, there are several common myths that may set some franchisees up for failure. This happens when an entrepreneur enters the franchise model with high expectations only to be let down by the realities that come with any business. It’s important to be realistic and deliberate in your approach to launching any new company, whether it’s an established brand or built from the ground up. As you weigh the pros and cons of operating a business franchise, do preliminary research and don’t accept what “everyone else” seems to tell you, even some of the franchisors.
Myth: Franchises are a guarantee route to success in the business world.
Fact: The main reason franchises are so successful is because of their rigorous requirements. For instance, most of them require large capital investments. Many of these investments are so substantial that only serious entrepreneurs would even consider signing on. Of those who purchase one of these businesses, not all of them have the assets allowing them to wait for a return on investment. The fact is that it can take a considerable amount of time for franchisees to generate a profit because of the high investment, royalty fees, etc. Thus, undercapitalization is the most frequent cause of franchise failure.
Myth: You can be your own boss.
Fact: While you will enjoy some perks that come with owning a business, you are still subject to the operating system provided by the franchisor. A few examples of this include hours of operation, approved equipment and supplies and even marketing items. What this means to you is that closing early on Christmas Eve may not be an option, unless you are willing to risk getting caught and any accompanying repercussions.
Myth: Buying a franchise is less expensive than starting your own business.
Fact: The initial cost of purchasing a franchise business is typically the same as building one from the ground up. This makes sense when you consider the real estate, equipment and supplies in addition to franchise fees (allowing the use of the brand name, logo, trademark and in some cases, marketing materials). Plus, royalty fees to be deducted from your profits later must also be factored into the equation. Of course, there is no reason to become discouraged. In truth, the key to managing a lucrative franchise is to find the right business opportunity for you, which brings about the next point.
Myth: Higher cost franchises translate to larger returns.
Fact: Rather than searching for the highest investment amounts, you should do your best to find a franchise that will allow you to make use of valuable skills. For example, if you have previous experience in the daycare industry, you should consider some of the children’s franchises in this industry. Though children’s salons are all the rage, your resources, economic and otherwise, will be better spent running a business you already understand. You will see higher profits sooner. Thus, putting your capital in one of the low cost franchises of which you are knowledgeable will prove more profitable than using your resources on one of the high capital franchises you know little about.
Myth: Franchising is a stress-free way to start a business.
Fact: Building a business of any kind can be very stressful at times. While franchises offer terrific benefits such as established name recognition, a working infrastructure and ongoing advertising campaigns, franchisees are not immune from the ups and downs of business ownership. The fact is that these benefits come with specific requirements. Not only are franchisees expected to operate within certain guidelines as mentioned previously, they’re also held accountable for the financial success of their stores. One illustration of this might be a business franchise that experiences a drop in sales over one month. Not only does the owner have to deal with loss of revenue, he or she has to provide an explanation to the franchisor.
Myth: Owning a franchise means you no longer have to deal with employees.
Fact: Developing any business takes not only a monetary investment but also your time and effort. Chances are, you will spend some time, even though it may be very little, making sure things go smoothly at your store. For instance, imagine owning a restaurant franchise. You stop by to visit with your manager about changing coffee suppliers when you notice an unusually full parkinglot. You enter the restaurant to find that all the employees working at their maximum. Drink orders are completely backed up. Since you have a vested interest in making this surplus of customers is happy, it only makes sense for you to jump in and start making drinks. Moreover, if you plan to manage a multi-unit franchise, you will have to hire and develop a quality team of managers in order to achieve success. This would require a great deal of communication and consequently, demand spending time with management employees.
Myth: It’s better to purchase a brand that is already established in my region.
Fact: Going back to the restaurant example, if your goal is to open a profitable fast food chain it may be wise to open one that is already reputable in your community. After all, people know what you offer and that they enjoy it. On the other hand, you have to consider the amount of business the other restaurants are getting. Do they have customers from your territory willing to travel across town to dine there? If so, is the market big enough to share if you build a location in between your designated part of town and the other store(s)?
Myth: You’re always protected from competing franchises in your territory.
Fact: This depends on your contract. If your agreement is strong, you’ll be protected from unwarranted competition, even when it is due to a company merger or a second chain created by your franchisor. Additionally, you should always consider the time frame disclosed for when your territory becomes negotiable. Nonetheless, best way to attain a beneficial agreement between you and your franchisor is to have an attorney review these important documents before you agree to any of their terms.
Myth: The most popular (and lucrative) chains are franchise businesses.
Fact: While studies show that franchises are more financially rewarding overall, not all lucrative chains are franchises. Case in point: Businesses like Starbucks, Lone Star Steakhouse and Kinkos function under a company owned model. This means that the company owns each store but hires managers to run them.
If it Sounds too Good to be True...
With any business, the prospective owner must be prepared to put in a great deal of hard work, time and in many cases, capital. The only real way to guarantee success is to find the business that utilizes the resources already available to you (financial and otherwise). Most of all, it’s good to be optimistic as long as you remain aware of the dedication it takes to run any productive business, even franchises.
