How to Minimize Risks as a Franchisee

Posted in Franchise by Paul Hightower

The moment has never been better to enter the franchise world. But not every franchise is right for every person. It’s like buying a car: You have young upstarts (think Tesla) and the old guard (Ford). You can buy a used car (existing franchise location) or a new one fresh off the lot. To find the right fit for you, you’ll need to do your homework and evaluate the risks involved with a given franchise. In this post, I’ll tell you how.

The first step to evaluating a franchise’s risk is to research how healthy it is at the corporate level and whether there are unhappy franchisees who could harm your chances of success. Despite running your own business, as a franchisee, you’ll rely on the good name and corporate health of the franchise to help propel business. If there are unhappy franchisees, they could take legal or social media actions that might hurt the franchise or damage the brand, and by extension damage YOUR business. Even if you run a high-performing unit, unhappiness across the franchise system can hurt your prospects.

Next, consider the rules of the particular franchise you are considering. Are you prepared to play by them? These rules could change at any time, so are you prepared to adapt accordingly? Conversely, a bigger franchise may not be nimble enough to pivot quickly when faced with challenges. Are you patient enough to allow the process to move at its own pace? Like any big business, high-level strategy will come from the top down, so you should prepare yourself mentally to operate in that ecosystem.

Despite these inherent risks, the rewards are clear. First, you have a straightforward path to success. Franchising takes much of the guesswork out of starting a business because you have the advantage not only of corporate support, but also of the institutional knowledge and experience of entrepreneurs who have gone before you. This means that potential for accelerated growth after you demonstrate success is huge (think multi-unit expansions). Another key reward is simple: revenue. Franchises typically outperform other startups, meaning you start making money sooner.

So, the question becomes, “How do I mitigate the risks of franchise ownership and maximize my rewards?” Here are a handful of strategies that will help you succeed in the franchise world (I’ll skip over basic business best practices and focus on those strategies unique to franchisees):

  1. Be involved! Immerse yourself on the ground level, both with day-to-day management of your unit(s) as well as with franchisee groups across the system. Establish your seat at the table so that YOUR good ideas as a successful franchisee don’t fall on deaf ears.

  2. Pay attention to corporate and engage with them. It’s just as important to maintain a strong, open, and communicative relationship with corporate as it is with your fellow franchisees. Business people talk about being “aligned,” but it’s tricky to align with others if you aren’t engaging with them on a regular basis.

  3. Run a tight ship! This falls under the heading of “control what you can control.” In a franchise, control is a spectrum. Yes, you can indirectly control corporate strategy as a franchisee voice, but you have much more direct control over how well your unit is performing. Keep in mind that corporate will have its own system for evaluating unit performance beyond the bottom line. Focus on these along with good management and you’ll soon be a star performer!

  4. Reputation on the local level. Don’t underestimate the power that a good reputation in your community can have. Particularly when it comes time to sell. If your name and your business’s name are in good standing with the community, you could see all kinds of positives.

  5. Manage your franchise like an asset. Realize that your franchise is an asset and as such, keep it ready for a sale. You never know when an opportunity to sell might present itself and you want to be ready when it does.

We at Masterplans review hundreds of franchise business plans and FDDs, so we’ve witnessed firsthand the joys of successful franchisees. The franchisees we see expanding year after year are always the ones who really evaluate what it means to be a franchisee and have mapped out a strategy for how they’re going to minimize the risks while maximizing their potential for rewards.

Next up I’ll be exploring some of the rules and internal structure within which you, as a franchisee, will be expected to operate.

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Paul Hightower is Masterplans' VP of Business Development.

Tagged: Advice, franchises
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