Common Mistakes to Avoid as a Franchisor- Tips From Someone Who’s Seen Them All.

It’s fair to say that the bulk of Australian franchisors do not scale to the level they would aspire to. And it is often in the establishment of the franchise system, right at the outset, where maybe corners were cut in order to expedite the franchise system launch.

The allure of franchising promises rapid expansion and brand recognition. But behind the glitz lies a complex network of strategies, requirements and relationships, and navigating this landscape requires careful attention to avoid costly pitfalls.

Let's delve into ten critical mistakes franchisors often make, hindering their path to sustainable success.

Mistakes to Avoid

1. DIY Mentality

At Bane Franchising & Commercial Lawyers, we often receive requests, several months or years after the initial franchised brand launch, to fix the system. And while that is possible, it is easier to do it right the first time around.

DIY Franchisors, accompanied often by their brothers in arms, The Bargain Basement Franchisor, fill the bottom echelons of the franchising industry in Australia.

Whether it is ego or cash flow, cutting corners, doing it yourself with a view to getting rich quickly, is a cocktail for disaster.

Our recommendation, after seeing failure after flop, is to get the right advice upfront. It takes more time. But an overnight success often takes months if not years to achieve. Franchising is a long game.

2. Underfunding Marketing

One of the key gaps that most franchising consultants fail to highlight is the need for a brand to be impactful and for all of the marketing touchpoints to be meaningful.

After all, franchisees are not just buying a system, they are buying into a brand that has enough appeal to attract a growing volume of consumers.

Without embracing the latest marketing techniques and channels and investing in the brand’s appeal to a target audience– and as some would say– relying on the elusive word-of-mouth for a national network, then the franchise system is a house built on sand.

3. Financial Robustness

Building a strong franchise system demands robust financial footing. Economic modelling of both the franchisor’s as well as the franchisees’ profitability is paramount. It needs to be both realistic and without the contamination of inflated, hopeful revenue and personal costs often passed through the books of the franchisor’s business.

While there are no guarantees to franchisees, the onus is on the franchisor to ensure that the system delivers the opportunity to make an appropriate margin for the franchisees.

4. Costly Miscalculations

As part of the economic modelling phase, the franchisor is challenged with balancing the offer to the franchisee and deriving a profit for their own corporate structure.

The initial fee charged to the franchisee on entry to the system should cover the franchisor’s costs for onboarding, the franchisor’s own legal advice, and any structuring or labour costs required internally.

Often, at Bane Franchising & Commercial Lawyers, we have seen an arbitrary initial fee chosen without calculating the real initial costs.

“It’s like a bill of materials,” says Bane Franchising & Commercial Lawyers’ Principal, Neda Whelan. “As a franchisor, you need to cover your costs of set up and onboarding the franchisee. Define those costs and ensure you are getting a return.”

Tempting franchisees with unrealistically low investment figures backfires spectacularly when reality sets in.

5. The Tug-of-War Clause

“The role of the franchisor’s in-house counsel or legal representative is to create a fair but favourable legal agreement for the franchisor. There is legislation which frowns upon unfair contract terms,” says Neda Whelan. “That does not mean to say that a franchisor shouldn’t include all of the key stipulations they expect for the smooth running of and adherence to the franchise system. But overbearing terms may repel potential franchisees while offering little practical benefit. That’s why it is important to engage a franchising lawyer who understands the practical application of each of the terms and clauses. Getting behind the façade of the legal agreement and diving into each ramification is what defines a commonplace lawyer from a commercially savvy one.”

Hiring a lawyer can be costly. But hiring a lawyer who does not understand the practical ramifications of the legal agreement is not only expensive, it is inefficient.

6. The mismatch of the franchise agreement and the operations manual

“Even franchising consultants get this wrong. And some don’t offer an operations manual at all,” says Neda Whelan, Principal of Bane Franchising & Commercial Lawyers.

“The franchise agreement refers directly to the franchisor’s operations manual. In fact, commercial and operational policies are often created before the legal agreements, which sequentially seems logical, but in fact, the legal framework needs to be the foundation for the operational toolkit. It’s a bit like writing the contents page before you write the book. It sets the direction and ensures alignment. Often because of the lack of attention paid to the alignment by franchising consultants, we find gaps. These gaps put the franchisor at risk and can lead to dispute.”

“Cobbling together an operations manual” is often the language used by franchisors. This is plainly a shallow approach to what is one of the mainstays of the franchising process,” says Whelan.

7. The Growth Rush

While it is an exciting prospect to launch a new venture such as franchising, with the potential for revenue generation, launching immaturely comes at a cost.

One of the errors made by franchisors newly anointed with their suite of legal documentation is to rush out and recruit franchisees across the country.

“We see two errors in this strategy,” says Neda Whelan.

“Firstly, what are the franchisees buying into? Has the brand marketing strategy been established – or even launched in advance of franchisee recruitment to create latent demand? It’s easier to promote a known brand to franchisees than an unknown brand.”

“Secondly, we have seen franchisors spread themselves too thinly especially across geographically distant territories. A solid operational and support infrastructure needs to be in place before venturing into uncharted territory. It would be wiser to use an adjacency strategy so that – at the start – the franchisor can support geographically closer franchisees. After all, a new franchise system is not fully tested and closer collaboration is required at the outset,” says Neda Whelan.

8. Franchisee Recruitment – The Do’s and the Don’ts

This is where the fun comes in. Meeting new people, sharing opportunities, and discussing potential.

But not having a strong set of values and criteria upon which to evaluate the potential franchisee is fraught with danger.

"After all, you are looking for business partners with whom you will spend, on average, five to seven years working. Ensure that you can work with the franchisees you recruit. Look at their professional and personal values. Can they represent your brand? Will they be open to your guidance? Do they have financial nous? These are all questions that the franchisor should pose,” says Neda Whelan, Principal of Bane Franchising & Commercial Lawyers. “I have seen so many mismatches occur certainly in the ‘credit card franchise’ buy-in end of the spectrum, where a buy-in price is low and the barrier to entry is low as well.”

Lowering franchisee selection standards for immediate gains may not always be the smartest brand strategy. While it brings cash flow to your organisation, it may not serve your brand if the franchisee is less compliant than desired with such mandatories as customer service standards, appointment setting and keeping, and communication with customers among others.

Inadequate screening and training result in poorly aligned franchisees who struggle to represent the brand effectively.

“At the higher buy-in bracket, it becomes more difficult for the franchisor to say no. Especially, when combined with fit-out and set-up costs, the investment of the franchisee could reach amounts over a million dollars. But this is where marketing plays a crucial part by identifying and promoting the ideal criteria you are seeking in a franchisee,” says Whelan.

Implement detailed evaluations based on the avatar of the ideal franchisee, extensive training and ongoing support to nurture a solid working relationship.

9. Not dotting the I’s in a sale of existing territory

“This is one for the franchisee, more so than the franchisor, but it is important nonetheless. Make sure you know what you are buying,” says Neda Whelan. “Perform a stock take as the incoming franchisee of both product and equipment and ensure they are represented in the sale of business document.”

Additionally, the franchisor has to give consent to the sale of an existing territory and cannot unreasonably withhold it. There are reasonable grounds to withhold consent – and a franchisor should consider if these are appropriate in their case within the relevant timeframes. These criteria could relate to the alignment of the prospective buyer to the franchisor’s brand and system, in addition to breaches by the current franchisee such as performance or payment issues.

“Keeping an eye on the sale of business, the incoming prospect and their suitability will save headaches for the franchisor farther down the track,” says Whelan.

10. Neglecting Network Nurturing

Franchising is the long game, not the get-rich-quick scheme some imagine. The profitability and growth of the network, if your franchise system is established robustly, equates to the profitability and growth of the franchisor. The network of franchisees you recruit is the backbone of the brand. Without constant attention, nurturing – and in some cases – performance management, your franchised network will wither.

Like any human being in a professional setting, franchisees require and – mostly – cherish being challenged with innovation to help grow their bottom lines. Franchisees are not called ‘risk-averse entrepreneurs’ for nothing. They want to thrive and grow– albeit within the rail tracks of a system and an innovative and growing system to boot. This becomes doubly important as the relationship with the franchisee matures and the franchisee is considering renewal or other options. Showing them the long-term vision and their role in it is a means to great franchisee retention.

Providing significant value to the franchisees means prioritising their profit-making capability and supporting them to grow their businesses.

And this is one of the challenges that many franchisors have: While they can run their own business, and they have been able to create scale through process and operating systems, the leadership qualities of team development, guidance and support, and empathetic qualities expected of the best leaders, often elude franchisors. Moving from owner-operator to network leader is often the biggest hurdle and– psychologically– often acts as a barrier to growth.

Conclusion

The allure of franchising is undeniable, and navigating through the complexities requires a cautious and well-informed approach. By prioritising robust systems, sound financial modelling, and a collaborative relationship with your franchisees, you can take your brand towards sustainable success. As you take on this endeavour, assistance from an experienced franchising lawyer- Bane Franchising & Commercial Lawyers’ Principal, Neda Whelan, could come in handy. Unlike other lawyers in the Franchising Law landscape, she is someone who has lived the franchising journey and has seen it all from up close. Connect with her today.