3 Mistakes People Make When Buying Franchises
Avoid Common Pitfalls and Turn Your Franchise Purchase Into a Successful Career
There are more than 1,200 systems operating in Canada, operating in 80 different industries. As you explore Canadian franchise opportunities, you’ll have a lot of business concepts to choose from — but not all of them are good. Some franchises have excellent operations, training and support. Others are lacking. Some franchises put your particular set of skills to maximum use, generating success by building off strengths you bring to the business. Others rely on skills and experience that you may lack, which could make you a poor fit for the business.
Choose the right franchise for you and you’ll have a great chance for long-term success; choose wrong and you can expect years of struggle, or outright failure. I work with clients to help them sort through the 1,200 opportunities that are out there and find the ones that are both worthy, and a good match.
Here are three common mistakes to avoid when considering a franchise system:
1. Not exploring your options
Everybody has heard of Tim Hortons, McDonald’s and Canadian Tire. And there’s a good chance that when you start exploring franchising, you’ll look up the cost of investing in those businesses, as well as other well-known restaurant and retail establishments — and you’ll wind up with sticker shock. Starting a retail business is typically expensive — at least $300,000 in initial investment and often much, much more. In contrast, most of my clients wind up starting a franchise businesses by making a total investment of $250,000 or less. The secret? They found a less expensive franchise that still has strong financial performance.
The franchise industry is much larger than just restaurants and retailers. Food and retail make up only about 40% of the franchise market. Canadian franchises operate in a huge range of industries including senior care, education, fitness, automotive, marketing and travel, just to name a few. Many of these businesses are much less expensive than the restaurants and retailers that sit on expensive real estate, and may still be able to meet your financial and work/life balance goals. I can help you explore these options.
2. Not enough research on a specific brand
Once you’ve found a franchise brand that seems like a good fit, it can be easy to get excited and rush through your research — but franchise systems that look great at a glance may lose their luster once you’ve talked to existing franchisees. Existing franchisees can tell you what it’s really like to run the business on a daily basis, whether the business is performing the way they had hoped, and give you an idea of the effectiveness of the franchisor’s training, support and systems.
You should talk to at least eight to 10 franchisees while investigating the franchise opportunity, and you should make sure to talk to some top performers, some mid-range performers and some bottom-performers. Each group will offer different perspectives on the brand, and as you talk to them, you should ask yourself: Am I more like the top performers in this brand, or more like the bottom performers? Am I willing to do what the top performers do to succeed? Does the commitment needed for success match up with my willingness to work the business for years to come?
3. Underestimating cash needs
Businesses don’t generate profits on Day 1. Often, they don’t generate profits by Day 181. Franchise systems tend to have different periods of time before the franchisee reaches a break-even point with the business and begins to generate profits. Until then, you’ll need to have the financial resources not only to cover the operating costs of the business, but also your own personal costs. Remember, you won’t immediately be able to draw an income from your new business, so you need to make sure you’ve budgeted enough cash not only to keep the lights on and business humming at your new company, but also to keep the lights on and groceries stocked at your own home. That may seem obvious, but I’ve seen many, many small business owners fail to account for both personal and business expenses during the ramp-up phase.