07 Feb 4 Common Franchisee Fails and How To Avoid Them
Running a franchise is no cakewalk. Like any other business, it involves investment, getting your financials right; you need to have passion as well as the determination to work hard if you want your venture to succeed.
Here we discuss some common financials-related franchisee fails and steps you can take to avoid them:
#1 Investing in a failing business
Just as there are a number of legitimate franchise businesses in Australia, there are many franchisees that look to sell their businesses. They try to impress prospective franchisees with stories of excellent returns and humungous success. They show you statistics and figures to prove to you that they have a roaring business and tell you that you can be part of something great as well.
But there are times when these franchisees are just painting a pretty picture that’s almost always incorrect. So if you are purchasing a business from an existing franchisee at a price that’s way lower than the market rate, you shouldn’t take what the owner is saying at face value. Make it a point to investigate and find out why the owner is selling their business and whether it’s in the red. Take advice from legal and accounting professionals as they would immediately be able to identify if something is wrong.
#2 Not assessing the viability of the rent commitment
This is a very relevant point if you are planning on investing in a franchise that operates in the retail space. With the real estate market in a constantly volatile state, landlords can sometimes become extremely inflexible. You need to conduct a good amount of research and find out what amount of sales are realistically possible and then measure that up against the amount you are going to pay for rent. It’s rare for rental costs to drop over time.
In fact, when it’s time to renew the lease, your landlord may just end up raising the rent price considerably. While it may be possible to cut costs in various other aspects of your business, it isn’t something you can do with your rent amount even if your business doesn’t bring in as much revenue as you expected it to. This is why you need to assess the viability of the rent before you take the plunge.
#3 Maintain transparency while dealing with the bank
If you are seeking a loan to start out on your franchise business, it’s vital that you calculate exactly how much you would be able to pay back. This includes things like the franchise fee, the rent for the premises and monthly repayments of your bank loan. It’s very important that you be forthcoming with accurate information related to your current outgoings in your discussions with the bank. This will help them make a fair evaluation of your repayment capacity. While this may sound counterintuitive, especially at the outset when you really need the funding, it’s best not to over-commit; just reset your original budget instead.
#4 Not factoring in the working capital aspect
When you start out on your franchising venture, working capital becomes a very important aspect of your business; this is because you may not have sufficient cash coming in at all. If you don’t have sufficient funds to pay the bills, continue trading to sustain your business and manage your basic living costs, you can become unstuck very easily. This is why you need to factor working capital into your franchise business plan.
It’s important that you handle your financials wisely and make sure that you set some funds aside for those rough patches that may surface along the way. If you want to know anything more about setting up a franchise business or want some sound and professional advice, call The Franchise Institute on 1300 855 435 or fill in this contact us form and we’ll reply as soon as we can.
Thanks for reading,
The Franchise Institute Team
1300 855 435