Franchising Risks: Identifying Them and Minimizing Them

Like any other business endeavor, franchising brings with it risks and benefits. Identifying the biggest franchising risks and trying to minimize them is likely to increase a franchisor’s chances of succeeding in his or her efforts.

One of the biggest hurdles in franchising is selling your first franchises. It is not enough to sell franchises to anybody. That would be too much of a gamble, and gambling happens to be among those franchising risks that have no place in a successful franchise company. You have to be certain that the franchisees you select will be the best possible fit for your franchise company. In other words, you have to vet them when they first apply to become franchisees.

 

Minimizing Specific Franchising Risks

 

If you have specific, detailed criteria describing your ideal franchisee, and if your criteria actually make sense for your business, then half the work is already done. You will be able to narrow down your pool of prospective franchisees so that it includes only the most desirable candidates. This is a very important part of the franchising process because, at the end of the day, it is the franchisees who will make or break your franchise company. If they don’t have the capacity to bring in a sustained stream of revenue then, sooner or later, you will be facing financial disaster.

There is no simple formula for selecting the right franchisee. Different franchise companies have different business models and offer different products or services to distinct markets. Selecting the right franchisee will necessitate attention to the unique qualities of your franchise company and calculations to determine what sort of person would be best placed to run a franchise unit in it. Simply duplicating the formulae followed by your competitors would be a big mistake. Business decisions must be tailored to suit specific businesses. Applying generic solutions to specific problems in such a scenario would be one of the biggest franchising risks you could take. Chances are you would end up experiencing problems in your relationships with your franchisees.

Other franchising risks become relevant during the later stages of the franchising process. One of them is the risk that franchisors take when they push for the accelerated growth of their franchise companies too soon. Such franchisors forget that it is their role to nurture the already operational franchise units and ensure they are thriving before running off to sell thousands more franchise units. A franchise company is viable as long as it has the capacity to give support to its established units. If a franchisor sells too many franchises too soon, then his or her resources will be stretched too thin. It will not be possible to give all the established franchisees the services that are provided for in their respective contracts. Naturally, without this kind of support and investment, the franchises will not do too well. This will ultimately result in the drying up of the franchisor’s revenue stream.

Franchising Guide

In order to turn your business into a franchise company, you need to have a set of recommendations to follow: you need a franchising guide. It doesn’t have to be a single, comprehensive text offering you every bit of information you need to know about franchising. Your franchising guide could be a website, or a series of websites designed with prospective franchisors in mind. It could include useful articles about the franchising process as well as products for prospective franchisors to purchase.

Websites of this kind are often directed at individuals who would like to be directly involved in the process of franchising their businesses. They may have reservations about simply handing the whole process over to a franchising expert or consultant without themselves taking the time to understand what it entails. Thus, they visit these websites, seeking to understand the steps involved in franchising, and the resources necessary to execute them.

They may ultimately decide to go the do-it-yourself route as franchisors. Alternatively, they may decide to hire professionals to facilitate the entire process for them. If they opt for the latter, they cannot be said to have wasted their time looking into the process and then handing it over to another individual. In fact, their actions are commendable. By seeking to first learn what they can from an online franchising guide, they are better able to supervise the franchising of their businesses by experts. This is positive. After all, informed ‘bosses’ are far more effective than ignorant ones.

 

A More In-Depth Consideration of the Franchising Guide

 

Some of the topics that an online franchising guide is likely to tackle include tips for identifying a business that is suitable for franchising, the pros and cons of franchising one’s business, advice for selecting the best possible franchisees from a pool of applicants, recommendations for optimizing a franchise agreement, and the legal issues faced by franchisors.

In some cases, franchising guides are not websites, but magazines and other publications from organizations that focus on franchising. Such associations include the International Franchise Association, and regional organizations like the ATLFA (Atlanta Franchise Alliance).

Among the best resources available to prospective franchisors are actual franchisors who have been doing it for years and can talk about it, not in general terms, but with reference to specific contextual details. Information of this kind is critical in helping prospective franchisors understand the complexities involved in the franchising endeavor. Reaching these franchisors need not be an impossible mission. Thanks to social networking sites, there are plenty of opportunities for aspiring franchisors to ‘meet’ ongoing franchisors and to learn from their mistakes and their successes.

Franchise Territory

A franchise territory is a region within which a franchisee has the right to locate his or her franchise unit. You could call it the catchment area for a particular franchise unit’s customers. If the franchise territory is exclusive, only one franchise unit of a given franchise system will be located within it. From a franchisee’s standpoint, this is ideal as it means that there will be no competing franchise units to contend with. From your standpoint as a franchisor, it may or may not be ideal, depending on the nature of your franchise business and other factors.

As a franchisor, you earn most revenue when the franchise units in your franchise system profit. So it is in your best interest to see these units thrive. If you allot each franchise unit a disproportionately large franchise territory, you will have more potential customers than you can serve. Chances are that you will end up losing them to competing businesses. This is not ideal. On the other hand, if you allot each franchise unit a disproportionately small territory, or if you allow more than one franchisee to set up franchise units in one territory, you could easily end up undermining all of the franchise units. They may find themselves competing for a limited number of customers. Sooner or later, at least one of them will go under because it will be impossible to drum up enough sales or profits to continue running.

 

Facing the Franchise Territory Issue Head On

 

In order to avoid future disagreements with your franchisees over franchise territory, you must make sure that this issue is addressed in length and in breadth in the franchise documents (i.e. the franchise disclosure document and the franchise agreement). Most importantly the conversations on the subject should take place before any documents are signed or transactions between you and your prospective franchisees completed. Hashing out details of this kind beforehand is the best way to ensure that franchising is as smooth a process as possible.

There are a number of details you should clarify in your conversations with your franchisees about territories. You should indicate to them what the nature of the territories will be (i.e. exclusive, non-exclusive or non-existent). You should also clarify what the process of determining territories will be. If you reserve the right to determine the location of the franchise unit, you should say so. If the franchisee is allowed to give some input into the decision-making process, you should indicate this. You should also be clear about whether you will be imposing conditions such as minimum sales quotas on your franchisees.

Franchise System Success

Is there any sure formula for franchise system success? The safest answer to this question is “No.” In business, there are never any guarantees when it comes to systems involving contextual factors like other people and entities. There will always be some element of the unpredictable about them. You can anticipate, speculate, and determine possible outcomes in your franchise system, and you can work towards them. In the best case scenario, everything will work out well and you will succeed beyond your wildest expectations. In the worst case scenario, an unexpected factor can undo all your well-laid plans, and if you don’t have any back-up arrangements, you will be in a fix.

This is not unique to franchising. It is the way of the business world.  You may plan, coordinate and implement arrangements, but there are no guarantees that you will profit. However, if you are open to creative ideas, and if you are willing to put in all the hard work necessary to get things started and then to sustain them, you have some hope of achieving success.  Subsequently, the key to doing well is to learn what conditions, decisions and actions were behind your prior mistakes, and then to avoid replicating them. Experience, whether direct or indirect, is the ultimate teacher in business. It is complemented by the courage to take calculated risks and the prudence to lay down a fall-back option ahead of time.

 

The Franchisee Factor in your Franchise System

 

For your franchise system to work, it will have to achieve a balance between meeting your own financial goals and ambitions and enabling your franchisees to thrive. As the franchisor, you will have control over such factors as marketing, franchise design and operation, and product quality. However, you will not have the ability to force your franchisees to work within the limits you have set. They will have to be amenable to the terms of your franchise agreement in order for your franchise relationship to work. They will also have to have managerial skills and abilities commensurate with the needs of your specific franchise. It would do you well to look into their backgrounds before selling franchising rights to them.

It is also important to give your franchisees a breathing chance when assigning them franchise territories. You might think that setting up numerous franchises in a particular territory will maximize your potential revenues. However, if you miscalculate, you will cause some of the franchises to go out of business. This will only undermine your franchise system.