WHAT WENT WRONG?

In buying a franchise, some costly mistakes can happen from the time of planning, in the initial communication between the parties, in the structure of the franchise fees and royalties, in selecting a location, or during the management and operation of the business.

1. At the outset, you need to ask yourself: Is franchising the best option for me? Franchising is one way of doing business and not necessarily the best way of doing it. Franchising is not ideal if you are interested in establishing a manufacturing business or for transfer of know-how and, it's definitely not good for information technology because of the fast-paced and sometimes unpredictable way that the industry can develop.

2. Franchising is ideal for retail businesses where the franchisee obtains the rights for three fully integrated elements: the right to use the brand name/marks; the right to use the business system/know-how; and the right to sell the products/services.

3. Relying solely on the franchisor’s franchise marketing material, improper preentry market research and miscalculation of the required financial resources are a prescription for certain future failure.

4. There can be misrepresentations by both parties where the franchisor tries to show that he has the best business and support system and where the franchisee tries to show that he would be the best operator/ developer of the business in the target market. Clearly, overpromising, lack of understanding, setting false expectations and lack of transparency is not going to help anyone.

5. Franchise fees and royalties are meant to cover the costs associated with helping the new franchisee in establishing the business in a new market. This includes cost of training and transfer of know-how through operating manuals. If the franchise fees and royalties are over-estimated, then the business will be unable to bring in a good return on investment over an acceptable period. If the franchise fees and royalties are under-estimated, it may cause loss of interest from the franchisor side, as they are not making enough money to cover their costs in supporting the new franchisee.

6. Humble sales and profit levels and sometimes losses are caused by the franchisee’s poor management, lack of support from the franchisor and of course, under-capitalization for the first two or three years of the business. Poor management may include under-budgeted launch/ongoing marketing, lack of proper corporate structure, unqualified executives/operational staff, no or bad geographical customization of the business model, menu/product range and store designs, poor supply chain and product sourcing and limited ongoing research/development by both parties, and above all, over-spending or what I call ‘corporate arrogance’. At the end and with continuous poor financial returns, both parties will lose interest and elect not to continue with their losses.

Wondering why franchising might not be right for you? Sary Hamway, COO of the World Franchise Associates, sheds light on politics and profits