In part one of our series we discussed a few reasons franchises fail and what you can do to prevent it. In part two, we will wrap up our discussion with a few more.
#3 Low Working Capital
New businesses require a lot of working capital. Of course, there is the initial investment amount. In addition, the location must be purchased or rented, and the business started. Start-up costs vary based on what is provided by the parent company and whether or not there are existing employees.
Problem: Aggressive, ambitious entrepreneurs may believe that they can do things more efficiently than their predecessors. It becomes disastrous when this is combined with the false belief that they can do it at a lower cost and reach income success quicker. Business expenses add up quickly and revenue usually starts off slow.
Solution: Realistically project capital needs, then add a buffer. It is always better to estimate needing more and wind up spending less, than finding your company undercapitalized. It is easier to slowly reach revenue success when the ability to cover business expenses is not compromised.
#4 Underestimating the Commitment
Owning a business takes a tremendous amount of time and effort. New business owners should be prepared to be completely involved in the daily operations for an extended period of time, initially. Once the business is established and operating well, the reins can then be handed over to a well-trained management team.
Problem: A common trend in franchise ownership is business owners who wanted to be their own boss and did not realize what it took to be the boss. When a business owner treats their business as a part of their life, it does not afford the business the time it requires.
Solution: Prior to investing in a business opportunity, spend some time getting to know the business, what the franchisee offers, and what it will take to be successful. When the parent company offers amenities such as being included in marketing plans and central payroll, it can reduce some of the time a business owner spends but does not eliminate the task. Initially, plan for your new business to be your life, not simply a part of it. Over time, the amount of time you spend should decrease, but the initial time investment is great.
#5 High Building Rent Costs
Rent is the biggest long-term, fixed cost in any business. Rent is very rarely negotiated and is not seasonal. Ideally, the cost of rent or a building lease should be less than seven percent of projected revenue.
Problem: When a business enters into an agreement that is nine percent of revenue or higher, it is difficult for any business to stay afloat, let alone thrive. Many “prime locations” are expensive to rent because of the high-traffic potential that makes them so attractive to business owners.
Solution: Start modestly. It is very common for new business owners to take the world on, hard-charging, with stars in their eyes, visualizing success before the legal agreement officially makes them business owners. Many multi-billion dollar industries had humble beginnings, it is completely appropriate for your new business too. It is much better to start in a location you can comfortably afford and then move to an ideal location once you are successful.
Buying a franchise and becoming a business owner requires much more than finding a company that you believe in and purchasing a part of the pie. Being successful in the franchise world requires hard work and dedication. Avoid these common mistakes that doom franchises to fail and become a franchise success. There are many more successful franchise owners than failures, but a failure can be devastating to a small business owner, and most of it is completely avoidable. Just remember that nothing that’s easy is worth it and nothing that’s worth it is easy!