Franchising mistakes to avoid
To become a preferred franchisor, franchise companies should avoid the following ten mistakes.
1. Not charging a royalty on sales but rather adding margin to product
This is problematic, as the franchisor will not benefit from a franchisee adding additional products or services to its range. In addition, according to the Competition Act, the franchisee cannot be forced to purchase goods from the franchisor, especially if similar products are available at a lower price. If franchisees have to pay exorbitant prices for the products, they will engage in deviant behaviour such as selling products from competitors or they will simply buy elsewhere. The franchisor needs to supply franchisees at market related prices and constantly ensure that the business model remains viable.
2. Being undercapitalised
A franchisor without capital reserves will not be able to support a network adequately, especially in the beginning phases of the franchise. This could lead to franchisees losing money and could ultimately damage the brand and the business.
3. Not charging a marketing fee
This should not be a selling point for the franchise! Marketing is essential to build the brand and the more fees are collected, the more impactful the marketing will be to the benefit of franchisee and franchisor. It is very difficult to introduce a marketing fee at a later stage, it should be charged from inception. In addition, franchisors should note that the marketing fund should be administrated separately in accordance with the CPA.
4. Supplying other agents/outlets that are not franchisees at the same price
Franchisees pay a premium to become part of a franchise. To supply other distribution outlets that are not part of the franchise at the same price negates the benefit of being part of the franchise group and will lead to franchisee dissatisfaction and an unhappy network. It will also have a negative impact on the trust that franchisees have in the franchisor.
5. Falling behind the competition
It is the franchisor’s role to ensure that constant research and development is done to stay ahead of competition. Whether technical product enhancements or updating the look and feel of a restaurant, if the brand starts losing ground to the competition due to an outdated offering the blame falls squarely on the franchisor’s shoulders.
6. Not testing the business model adequately
The franchisor needs to ensure that the business model is viable. The franchisee must be able to achieve a complete return on investment after drawing a market related salary within 3-4 years. If the business model is not profitable enough to achieve this, the business is not franchisable.
7. Selecting the wrong franchisees
Franchising Plus firmly believes that franchises are ‘awarded’ to deserving candidates, as opposed to being sold to any person that meets the funding criteria. The success of a franchise depends on selecting franchisees that share the franchisor’s vision and values and that are committed to the brand. Franchisees need to be hands-on operators and not passive investors, as the owner operator effect lies at the heart of successful franchising.
8. Not unlocking the power of collective buying
One of the major benefits of joining a franchise network should be access to collective buying. This should include all aspects relevant to operations, from products to marketing material and uniforms. The franchisor should constantly look for the best deals for the franchise network and pass this benefit on to franchisees.
9. Not looking for collective sales opportunities
A franchise network has the benefit of national representation in most instances. This unlocks opportunities for tenders or other national contracts and the franchisor should actively look for opportunities like this for franchisees.
10. Not listening to the opinion of franchisees
It is vital to create platforms for franchisees to voice their opinion and channel their input, for example by implementing a franchisee representative council. Too often franchisors dismiss the opinions of franchisees as ‘gripes’. They are at the coalface and understand the needs of the customer best.
About Anita du Toit