So your brand has gotten some serious traction, and is doing so well that you’ve opened it up to franchisees. Congratulations! This is a big milestone for both your brand and yourself. Establishing a franchise system will give your brand more exposure, not to mention additional income from franchise fees, royalties, and other options.
But establishing a franchise is not a hands-off process, nor is it without peril. Establishing a franchise is a business venture, and subject to risks just like any other. Here are seven potential problems you may encounter with your franchise:
Saturating Your Brand
In franchising, there is such a thing as overexpansion. While opening a large number of franchises may earn you short-term profit through franchise fees and licenses and make you highly visible in the market, you also risk saturating your small business brand with piggyback branding. When this happens, consumers become tired of your brand and see it as too common and pedestrian. This could also be due to overzealous marketing. They may decide to go to your competitors for “something different”.
Another danger of over expansion is diminishing returns when it comes to franchise profits. Franchise territories can only support a certain number of franchise branches. After a certain point, the different franchises compete against each other, which will end up lowering their sales numbers and give a skewed indication of performance. You want your franchisees to be drawing customers away from your competitors, not your own stores. This is precisely why one of our clients, a private clothing label brand, refused to go into franchising even though it got repeated offers from venture capitalists.
As a franchiser, you determine the locations for each new branch of your business. The problem with that is that you are not as familiar with individual neighborhoods as locals, and therefore may inadvertently place your franchise in an unfavorable location.
Consider hiring a local representative to scout each potential franchise site and determine their suitability. It’s important for you not to do this yourself, as location scouting is a very time consuming process, and you’re better off spending time on other business issues.
If you are the sole franchiser, and work with few or no additional franchise management staff, then you are the bottleneck for the franchise. You may have an excellent brand, but if you decide to retire, or you suffer an illness or accident, then your franchise is dead in the water. Your franchisees will have no one to whom they can refer or approach for help, and they’ll be plagued by legal issues lawyers try to determine ownership succession.
Train a support team as soon as possible, who will be responsible for brand compliance and franchise performance. Not only is this good succession planning, it will also off-load the work to other shoulders and allow you to focus on your core business.
Franchises are subject to strict legal and operational limitations as determined by your brand, and you have to make sure all the paperwork is complete and in order. This includes lease agreements, employment procedures and contracts, financing and compensation terms, and a whole lot more. Don’t just copy franchise agreements and contracts from other competitors. Their setup might not apply to your business, and who’s to say that they’re doing it right in the first place? Hire an experienced professional (even on a contractual basis) to draw up franchise legal documentation and operating procedures.
In opening your business up for franchise, you risk exposing your brand to people who aren’t as committed to it as you are. There may be franchisees who do not care about your overall brand image as long as their tills are full. You will encounter franchisees who are slow to comply with corporate directives or report sales. Some will not want to participate in franchise-wide sales and promos.
Before you recruit a franchisee, you have to evaluate them for their suitability. Make sure that they are truly committed to your brand and developing a good business relationship with you, your franchise manager, and most importantly, your customers.