The 10 Biggest Mistakes Franchisors Make
Franchise & Business Litigation Attorney
Thousands of franchise companies offer countless goods and services in the United States. Many are successful in growing their brands, delivering quality goods and services to the public, and generating profits for franchisees and for themselves. Many, even franchisors with long histories, are not as successful as they could be.
Here are some of the biggest mistakes franchisors make.
1. Franchising Without Enough Capital
Why do some franchises fail? Franchisors who do not have sufficient funds in their own company, are unable to screen franchisees, perform the supervision and deliver the assistance needed for the system to succeed. Also, lack of funds makes the company appear financially weak. These franchisors are forced to lower their standards and are unable to assert proper contractual authority with franchisees. Lack of capital can be destructive to a franchise system.
2. Underestimating Costs
There is temptation to show prospects that the investment to start a franchise is low. Franchisees depend on the franchisor’s costs estimates being accurate. If costs are underestimated, franchisee recruits will become dissatisfied when they learn their true costs, and some will not have enough funds. Franchisors should be candid in estimating the investment costs, and should build in a margin for unanticipated expenses and costs.
3. Making the Franchise Agreement Too Strong or Too Weak
Overbearing franchise agreements can scare away potential franchisees without providing the franchisor a meaningful benefit. Many over burdensome terms will never be enforced, and some, if the franchisor tried to enforce them, would be found to be unconscionable. Conversely, franchisors should review the agreement forms regularly, evaluate which subject areas address true risks for the company and system, and selectively strengthen those provisions.
4. Expanding Too Fast and Too Wide
The chance to expand is intoxicating as it gives the appearance of success to the brand and system. But moving too fast, or having distant locations too soon, before the franchisor has infrastructure, support systems, and understanding of issues in different venues, leaves the franchisor unable to properly manage, supervise and assist franchisees. This mistake can destroy even a good franchise concept.
5. Insufficient Screening and Training
The lure of initial fees and new locations tempts franchisors to lower standards for new franchisees and not devote enough attention to training. This results in franchisees who are hard to deal with and represent the brand poorly.
Franchisors should develop a profile of their preferred franchisees, addressing education, experience, motivation, cooperation, financial and other characteristics, and stick to that profile in recruiting and in evaluating potential transferees of franchised units. A significant investment in background checking, getting to know potential franchisees and providing thorough training to new franchisees in the system’s history, goals, and operations, will improve the prospects for everyone’s success.
6. Allowing Poor Locations
This is really a variant of expanding too fast. Compromising standards as to the locations of franchises results in unsuccessful locations, disputes and site failures. This takes up more of the franchisor’s time, costs money, and tarnishes the brand.
7. Quick, Do-It-Yourself Changes to the Franchise Agreement
Negotiating changes to the franchise agreement and hurriedly preparing amendments and addendums can result in misunderstandings, ambiguities and inadvertent violations of franchise laws, all of which can lead to costly disputes. It is less costly to allow the time required for thoughtful drafting of amendments.
8. Failing to Deliver Value and Service to Existing Franchisees
Too many franchisors come to take their successful existing franchisees for granted, enjoying the revenue they deliver and not delivering value in return. Franchisors should deliver continuous value and service, including marketing, support, updating of products. An existing franchisee should feel that they get value equal to or exceeding the royalties they pay, so that they remain satisfied and grateful to be part of the franchise system.
9. Squeezing More Revenue From Franchisees Without Considering Their Profitability
For a franchise system to work, franchisees must be profitable. Franchisee profitability and profit growth should be as much a goal as the franchisor’s own profitability.
10. Failing to Identify and Protect the Company’s Intellectual Property
A franchisor’s brand (trademark) and confidential methods are among its most valuable assets. Failure to protect these devalues the system. The company’s intellectual property should be identified and protected both contractually, and in operating procedures required of franchisees and within the franchisor company.
David Gurnick is certified as a Specialist in Franchising and Distribution Law, by the State Bar of California Board of Legal Specialization. Contact him via email: dgurnick@lewitthackman.com