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Buyer Beware: Common Mistakes Failed Franchisees Make

Aug 18, 2007
As you conduct more and more research into buying a business franchise, you will learn the importance of preliminary research, relying on experts (accountants, attorneys, etc.) and even the value of having an exit strategy from the very beginning. Still, just as there are common traits shared by successful franchisees, there are also common mistakes that can cause perfectly good concepts to go under.

Fortunately, the mistakes that became stumbling blocks for many other franchisees can act as stepping-stones as long as you are willing to learn from them.

1. Buying a business franchise in a bad location

Most entrepreneurs have heard the adage, "Location, location, location." Of course, this is common knowledge for good reason. Though location determines success for some business franchises more than others, it should always be taken into consideration before the final decision is made to buy a business franchise.

Retail franchises, for instance, are strategically located. Meanwhile, a successful tax franchise is not as dependent on a good location. This makes perfect sense once shoppers' habits are taken into account. Imagine a shopping center or mall at Christmas time. Shoppers frequent these places because there are several shops all within a relatively small area. Because they are shopping for numerous friends and family members, a mall or shopping center is ideal.

On the other hand, a store that is inconveniently located will inevitably be overlooked. Furthermore, shoppers are just as likely to pass by stores that are easy to see but difficult to access. Thus, when appealing to power shoppers, choose the location wisely. The lesson here: Before buying a business franchise, remember, "Location, location, location."

2. Buying into a bad business model

As ingenious as a given idea may be, there are some cases where you should avoid buying a business franchise.

One key factor to consider is your potential to "plug and play." Before you buy a business franchise, think about what it will take to operate that particular store successfully. For example, fast-food restaurant franchises often do well because most anyone can manage them.

In fact, many of these franchises are managed by young people, and many of them are students in high school or college. This is possible because customers go into a fast food restaurant franchise and expect the same food, the same service, etc. In contrast, a restaurant specializing in fine dining is more unique. The menu is certainly more complex, which means the chefs have a tremendous impact on the success of the restaurant. Moreover, the general manager and floor manager or head server are responsible for nearly all public relations.

When these issues are taken into consideration, it is easy to understand why buying a business franchise for a fine dining restaurant is far more risky than investing in a fast food restaurant franchise. Of course, remember that this logic can be applied to any industry.

3. Poor public relations

Those who have training, experience or even a college degree in public relations, marketing or advertising are at an obvious advantage. However, effective public relations takes strategic thinking and possibly a great deal of research.

With a small business franchise, the franchisee will most likely play a major role in implementing strategic communication. However, buying a business franchise that is already a well-established brand offers several advantages. Among these, franchisees benefit from an on-going national advertising campaign.

For example, a Taco Bell restaurant franchise is well known as a brand. And, their national advertising campaign promotes new menus, hours of operation, etc. Most importantly, this takes no effort on the part of the franchisee. Rather, guest relations within that individual store will be your primary concern.

4. Buying a business franchise in an oversaturated market

There are nearly 200,000 franchises in the U.S. today. Of course, with all this competition comes dense commercial areas and millions of advertising messages practically shouting over one another. To ensure that you buy a business franchise that will become profitable, make sure that the concept you choose offers a fresh idea.

For example, the latest trends include going green and getting healthy. Thus, going back to the restaurant franchise example, eateries that offer healthy menus are becoming increasingly popular. As far as major brands are concerned, Subway Restaurants are a good example of this trend.

On the retail side, one of the many new fads is being "pregnant with style." With celebrity babies posted on the cover of nearly every magazine at the grocery store check out counter, pregnancy has become "vogue," so to speak. Instead of hiding, women are ready to flaunt their new physiques, which means that trendy maternity stores are all the rage. No matter what you decide, it is best to buy a business franchise that offers a fresh idea but still has brand-name recognition and a franchisee-friendly business model.

5. Inadequate capital

Most entrepreneurs are well aware that it takes a significant amount of start-up capital to build a successful franchise. In fact, most franchisors publish the initial costs up front. Before any commitment is made, you have the opportunity to explore the initial costs and determine whether you are financially prepared to buy a business franchise. However, some are caught completely off guard when they learn that most franchises take a minimum of two years before they turn a profit. Therefore, not only is it essential to have adequate funding up front, it is also vital that franchisees prepare for the financial long haul. After a couple of years, the store becomes established, employees are trained and customer loyalty is won. At this point, your franchise business begins to generate substantial revenue.
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