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The five biggest mistakes potential franchisees make


close up of hands making bread

If you've never bought a franchise before, you can feel a bit overwhelmed. What’s the right decision to make about financing your franchise, hiring? Renovating? Marketing? It's easy to make mistakes, but you shouldn’t let that paralyze you from becoming a franchisee.

Tom and June were looking to open up a fast food franchise, but with no experience in owning a franchise (or any other business), they quickly stumbled over their own mistakes. Let’s look at the franchising errors Tom and June made so that you can avoid making the same mistakes.

1. Not doing their homework

June told Tom that she “had a good feeling” about the fast food franchise they were considering, and so they went with their gut rather than doing any research. Big mistake. There is plenty of information available for you as a potential franchisee, including the Franchise Disclosure Document, speaking with current franchisees, and simple internet research. You’ll kick yourself if you don’t do your due diligence and then later regret your decision (such as finding out your franchisor is being sued in a very public lawsuit).

Avoid the mistake: Ask for the FDD as soon as you begin speaking with the franchisor. Search online to look for news articles about the franchise, as well as common sentiment about the brand. Call franchisees and ask lots of questions.

2. Not budgeting enough

Tom and June did create a budget before they opened their business, but it ended up not being enough for the first year of expenses. Not only will you need funds enough to cover the initial franchise fee you’ll pay the franchisor, as well as your setup and improvements to the premises, payroll, inventory, and other overhead costs, but you will also need enough money to cover your personal expenses for up to a year. You’re not guaranteed to make a profit before then (or even then), so it’s important that your own expenses be taken care of.

Avoid the mistake: Build both a business and a personal budget when you’re in the preliminary business start-up stage, and ensure that you have financing to cover both. Ensure that you discuss your finances with a small business advisor at your bank so they can educate you on the best options available for your situation, whether it is a bank loan, line of credit, or credit card to help with cash flow.

3. Trying to do it all

June and Tom wanted to save money, so they decided not to hire employees at the start. As a result, they scrambled to serve customers, restock inventory, and manage their finances. They didn’t even have time to come up for air to consider the bigger picture for their business, which put it at risk.

Avoid the mistake: Hiring staff is actually a savvy business move, because it frees you up to work on business strategy. Employees can be hired at a much better rate than what it would cost to do what you do, so it’s a sound investment.

4. Relying on the franchisor for marketing

After paying the franchise marketing fee, Tom and June thought they were set. Unfortunately, franchisors tend to do very little local marketing, putting more focus onto national campaigns and commercials. That means the new franchise owners missed out on a lot of business because they didn’t get a local marketing plan together from the start.

Avoid the mistake: Before you even open, build your marketing plan. How will you reach local customers? Social media, coupons, email, and community events are all excellent marketing tools to consider.

5. Never asking for help

The franchisor is there to help you, so don’t ignore the offer. Tom and June struggled with bringing in enough to cover their bills, got frustrated with late deliveries from a supplier, and had other issues that they didn’t bother talking to their franchisor about... to their detriment.

Avoid the mistake: Keep the lines of communication open with your franchisor. They’ve been in the business a lot longer than you have, and have seen it all. They may have advice or new vendor contacts that they can offer you to relieve the pressure that’s on you.

Meridian Credit Union communications are intended for informational purposes only and do not constitute financial advice or an opinion on any issue. We would be pleased to provide additional details or advice about specific situations if desired.

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