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The four major pitfalls of franchising (and what to do about them…)

This is a follow up to my earlier post on Expanding Your Franchise.

Franchising is often viewed as a golden ticket to retirement but it can be a nightmare. Before you consider franchising your business, think very carefully about your model.

Firstly, if you have a business that is only slightly profitable after royalties then do not franchise, as it will be a world of pain. Franchising only works if you have a proven profitable model that is transferable and has growth potential.

Franchising comes with four major stings in the tail. These are:

  1. It is expensive to set up a franchise: Legal costs, preparing your training manuals, etc. to set your business up to franchise can cost in excess of $200K. But if you do it right it is well worth the investment.
  2. High risk of litigation: Whenever you are dealing with people and large amounts of money, even if you do everything right, you are still at risk of being sued. Sometimes when all good intentions go wrong, then a franchisee may look for someone to blame. When I was first starting out, my lawyer said to me that the one thing that is guaranteed is that sometime down the track you will be sued.
  3. Systems need to be tight: If you thought that running a business required you to have good systems and processes in place, well multiply this by 10 as this is the level you will need. There is the Franchise Code of Conduct that needs to be followed, systems for tracking sales, communication, marketing, HR, etc., etc. So your business needs to be in great shape before you franchise.
  4. People: The positives are that you get great people to deal with and have great ideas to share, the negative is that because we are all human, there are always negative people who you also need to deal with.

So how can you protect yourself from risk in such a fraught environment? The good news is there are some things you can do!

  1. Get good consultants: Like any industry there are reputable companies and no so reputable companies and the franchising world is no different. Try and get a referral to a franchising expert and if you cannot get a referral then make sure you reference-check the company and individuals connected with the company.
  2. Get a good legal advice: With the new laws there is no getting around the legals. Make sure that the law firm you select is a franchising expert. As I mentioned earlier, there is a risk of litigation and the way to minimize this is to ensure that you set up your system well and that you get good legal advice along the way.
  3. Understand the financial limitations: One of the major obstacles in getting a franchise off the ground is to ensure that you have good financial support from a financial institution and that the potential franchisee can get finance. The banks are fairly strict on who they lend money to and a franchisor traditionally will need to have been running successfully for at least 4 years and have at least 15 stores that are profitable. Each bank has their own criteria; it is a matter of ringing around and seeing what they are. This is a large barrier as there are not too many people that have a few hundred thousand Dollars sitting in the bank. This does not mean that you cannot franchise, as many people have other assets they can use as security.
  4. Assess your human resourcing needs: The other thing to consider is the additional cost of labour that you may need to run a franchise business. On one hand, you will not have to staff the businesses, as that is the responsibility of the franchisee but on the other hand, you may need more staff to manage other operational roles. For example, you may consider:
    1. Recruiting franchisees internally instead of using an agent
    2. Appointing a training team – particularly if you are growing
    3. Getting an internal lawyer (depending on your plans)
    4. Acquiring marketing resources now that marketing activities are increasing. You will also be responsible for managing a separate marketing fund.

In essence, you’ll need to do a full business plan to work out what you will need and when.

  1. Assess business training needs: Some franchisees that come into your business have little or no business experience, which can be why they choose to enter a franchise network.   One thing I like to suggest is that all franchisees do a small business course because while you may teach them how to run your franchise, there is a whole body of knowledge on simply running a business that they will also need to understand.

At the end of the day, franchising is great for certain businesses and certain types of people. Do not rush into making your business a franchise business. It takes planning, good emotional intelligence and capital to make your business a successful franchise business.


Janine Allis is the founder of Boost, part of Retail Zoo. The Retail Zoo stable of brands includes Boost Juice Australia, Boost Juice International, Salsa’s Fresh Mex, Cibo Espresso and Hatch Chicken Shop.

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