Imagine that a person has made a pile of money, and in that pile, he has put a spleen of burning matches. Some people in REAL LIFE do precisely the same when they take the franchise for business. Because when those people take the franchise for business, they make such significant mistakes, resulting in the business’s loss.
This blog lets us understand the mistakes, whose elimination is a must when taking the franchise for business.
If you are new at franchising then you can read this blog to know more about it.
Whenever we think of taking a franchise business, it becomes essential for us to know two things. First of all, we have to understand the right way to take the franchise, and on this topic, I have already written a blog, which is available here.
And the second thing that we should know when we take a franchise is the mistakes that ultimately result in huge losses.
The most significant losses happen due to 6 particular mistakes, which are
Table of Contents
Take a franchise for business only because it is in demand:
Yes, taking a franchise business just because it is in demand is a mistake that many people make. And the logic behind such an act is that if a franchise business is in demand, that means it is doing well, and the franchisees are making money. Also, as many people are interested in becoming the franchisee, it only confirms that it is a profitable franchise. Hence, they, too, should avail that particular franchise opportunity.
This thought process is wrong because some franchisees may have earned it in the beginning. But they were profitable because initially, the setup cost of that franchise business was low, and margins were high.
But as a franchise business expands and the number of franchisees increases, there is a possibility that on the one hand, the franchisor starts increasing the setup cost like franchise fees and the interior’s cost. On the other hand, the franchisor reduces the margin on products while decreasing the franchise agreement tenure. Thus, starting a new franchisee becomes expensive. On the other hand, continuing with an existing brand as franchisee also becomes more costly and less lucrative due to the reduction in franchisee earnings.
That is why it is not suitable to take a branded franchise just because it is successful and in demand. The food for thought is the chance to generate profit from a franchise business with increased costs and reduced product margin & franchise tenures? I think that it would not be easy. What do you think? Tell me by commenting in the comment box.
So let’s move towards our next point and know the second mistake.
Take franchise for business without deciding the budget:
When people think of taking a franchise for business, they make a fundamental mistake: they do not decide their budget first. The problem with not freezing the budget first is that the person taking a franchise business does not know how much they have to invest in a franchise opportunity. This situation has only three outcomes, which we will see in the three case studies.
Case Study 1: Loss Of Money
Like everybody else, the person (who has not yet decided on the budget), finalises a franchise opportunity by giving an advance. After providing the advance, that person starts assessing its financial status to make the remaining payment. Here, that person realises that it does not have that kind of amount at its disposal; hence he could not make the remaining payments. Then that person tries to borrow or take a loan to make the required payment. But the gap between money required and available cash is so high that it is not matched even with the loans and borrowings. Hence that person is not able to arrange the rest of the amount within the stipulated time. The consequence of not arranging funds within the specified time is that person has to leave that franchise business opportunity. Thus, the advance given is wholly lost.
Case Study 2: Poor Return On Investment
Just like the previous case, in this case, also the prospective franchisee, after having done all the formalities, realises that the franchise opportunity will not come within the available amount. Then that person goes for borrowings or loans or both to fulfill the required payment, thus over-levering oneself. The side effect of over leveraging oneself financially is not favorable for the profitability of the franchise business. As all the money earned goes into the repayment of the borrowings, loans, and interest. Thus, leaving nothing in the pocket. After some time, the frustration of not being able to generate enough profit sets in. Thus the franchisee starts questioning his decision to take that franchise for business. Simultaneously, a franchisee can have various negative thoughts in such a scenario. A franchisee may wonder,
‘Why am I doing the franchise business when there are no savings?’ or
‘if I’m earning only to repay the loan and borrowings?’.
Once such thoughts start coming into mind, the whole motivation to run the franchise business goes away. When the significant outflow from earnings is towards debt servicing, then return on investment is naturally very low.
Case Study 3: Loss of earning potential
In the third case study, people take a conservative approach concerning investment in a franchise business. The result of the conservative approach is that people take a franchise opportunity within the possible minimum amount.
Then they put hard work to run that franchise business. But even after giving the best efforts, they do not get the desired result. It is so because when the investment is small, then the earnings will be little too in most of the cases. When someone has made an investment and has worked hard yet, that person does not earn well. It is natural to have disappointment. Whereas, if this person had made the budget earlier, he would have had a much higher amount to take a better franchise opportunity and earn much better. In this way, many people lose the perfect opportunity to start an appropriate franchise business.
So these examples tell about what may happen if people take a franchise business without making a budget.
If you understand Hindi then you can watch my video on how to prepare the budget before taking a franchise.
Take franchise business just at a whim.
Many people get impressed with a franchise opportunity by just reading about it on a social media platform. They are so impressed that they firm up their mind to take it immediately. They assume that the franchise business has good earning potential based on the social media post. And they decide on their gut feeling. So, whenever we make a business decision based on our gut feeling, it is not a decision but a gamble. Just like the gamble or bet, it could go either way. What we need to understand here is the psychology of those who make such decisions? In other words, we need to understand what goes into the mind of the people who make such a decision.
There are two significant reasons for making such a decision.
First Case Study
it is possible that it has been going on in the mind of a person that he has to take a franchise business for a long time. Still, he did not come across any excellent or suitable franchise business. Thus, when such a person comes across a franchise business that he finds appropriate, that person may become impulsive and take that franchise opportunity. The impulsiveness could be because, for so long, that person has looked for franchise business opportunities. Finally, when an opportunity seems suitable, why not take that and close the hunt for the months. The thing to understand here is that finding a franchise opportunity is not a compulsion, work, or burden. Also, an individual doesn’t need to take a franchise opportunity in any situation. It is always better to wait until one gets the right franchise opportunity, instead of hurrying and losing the money.
Second Case Study
Similarly, in the second case study, some people would think about doing a particular business like fast food, bakery, and clothing in their minds. When they see any franchise opportunity related to it, they get excited and take that franchise business opportunity.
This approach of taking a franchise business is a pure gamble. If this gamble goes in favor, then well and good, the person has to stare at losses and finally have to say goodbye to the investment.
Take the franchise business by Compromising on the right location
Whenever we think of doing a franchise business, the three most important things that should be perfect are
- Place Of Business
- Business Site
All the three means the same thing. The place for franchise business is of such importance that if it is correct, then the franchisee has won half the battle. If the place of business is wrong, then a franchisee loses half the battle even before the franchise business starts. Most people do not understand the importance of business place enough, and they see it as an expense. Thus, such people put a lot of effort into getting a site within the least possible cost.
I am not suggesting that somebody should take the most expensive location. But the point is that a prospective franchisee should not take a location just because it is cheap.
Usually, people’s logic behind taking a cheap location is that if the rent is low, their expenses are less. As a result of fewer expenses, franchise business turns profitable. It is a very narrow way of looking at costs and that too in an inappropriate manner.
The fundamental question to understand here is, why do we take a place on rent? The answer is that we take an excellent location to increase our sales. Thus, when our business’s primary focus is to increase sales, how can the reduction in rent or lower rent become the main focus?
A simple fact is that every location’s rent depends on how much is its demand. And the demand depends on how much business can take place there. Hence, it is easy to understand that if the expected business is low at a place, then the rent will also be lower. If the business is high, then the rent will be high, and this logic applies to most of the places barring few exceptions.
So while taking a location for the franchise business, one should not look only at the rent but should see where one can generate maximum business.
Here is a BBC report on how to take the right location.
Take the franchise business on somebody’s suggestion.
When a person we consider to be an expert in a particular field gives a suggestion, many people believe it blindly. Now this person can be anyone. It can be a friend, a relative, a colleague, or a franchise consultant.
Something similar also happens to many people when they want to find suitable franchise business opportunities. Many people ask the person whom they consider as an expert in franchising for suggestions. Whatever that person suggests, people believe that suggestion as gospel truth and go with it.
But this is a very wrong way to take any franchise business as we do not know how informed is the person (giving the opinion) is. Also, we are unaware if there are other motives behind providing that opinion like their benefit. Then by listening to such people, there is a possibility of taking a wrong franchise and suffering losses. Therefore, it becomes crucial for people to know how to analyze and take a franchise business.
Here, the argument is not against seeking consultation while taking a franchise business. It is entirely ok to consult as many people as possible but do not accept others’ suggestions as to the ultimate truth.
People should do the due diligence of the others’ suggestions as they would do for any other franchise business opportunities. If the advice given passes the due diligence test, then only take that franchise business opportunity or else don’t.
It is not that people have to take a franchise opportunity anyhow and as soon as possible. It is essential to wait until one gets the right franchise opportunity.
Taking a franchise business, which one does not understand or cannot learn quickly.
Many people make the mistake of taking a franchise business about which they do not know anything. Thus in such a scenario, it is natural that a person will not earn a profit or earn very little profit.
Here, some people argue that when we take a franchise business, then the franchisor gives the training, so if they do not know about that franchise business, then there is no problem.
Although this argument is very logical, but everything gets stuck on what kind of training the franchisor is giving? In most cases, franchisor training is about the brand, systems and processes, products, present and future of the industry, and things like this. But hardly any franchisor trains on how to handle day-to-day issues. If a franchisor trains on how to handle everyday problems, then it is a different matter.
But suppose a franchisor does not provide such training, and an individual does not know well about that franchise business. Then the only way left is to learn on the job.
It will take months to understand everything and get a complete grip over the business in such a situation. Till then, there won’t be good results to see.
Alternately, suppose an individual goes with the franchise business that it knows very well. In that case, the entire franchise business is under its complete control from day one. Thus that business will have high profitability.
To dwell on this point, here is an example. We have heard the name of Warren Buffett. He is one of the top investment gurus in the world. He has an excellent friendship with Bill Gates, the founder of Microsoft.
But even after this, Warren Buffett himself says that he has never invested in any IT company because he does not understand that business. So how can the logic that worked for Warren Buffett be wrong for anybody else? Right?
If you understand Hindi then you can also watch this video
After going through the above mentioned points we can say that when people choose the wrong way to take a franchise then there is a possibility that they may end up with a wrong franchise. Just as we should know the right way to do the thing, similarly we should also know the way, not to do the things so that we end at the right opportunity.
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