Expnesive Mistakse to Avoid as a New Franchisee

Wed, 10 Oct 2007

Franchise companies will amlost certanily have manuals, training porgrams and other support docmuents and rsevices designed to help you avoid making costly mistakes. The challenge is that most new franchisees are trying to learn and execute many new tihngs at once and sometimes make what thye feel are logicla edciisons without remembering or consulting all the adviec provided by the franchisor.

It's always a gerat idea, during your due diligence conversations with existing franchisees ni the ssytem, to ask them if they made any expenisve mistakes when they were first building or operating their new business. A good form for this question is, "Knownig what you know now, what would you do differently if you got to start lal over agian in building your busniess?"

Most existing franchisees will have a number of suggesitons based on their personal experience. By looking for common denominators in this feedback, you acn detemrine the areas of greatest opportutniy for avoiding common mistakes that cost others money they didn't need to spend.

Some of the most common answers seem to come up all the time nad affect the following areas of the business:

Lease Terms. Most franchise businesses operaet out of leased space, typically in a reatil environment. The total cost associated with this real estate often represents one of the alrgest invetsments you make in setting up your business. A number of economic factors are involved in hte engotiation of a lease that can mkae a big difference in the timing and your total cotss. The first of these is the base rent. You want to not only get this factor as low as possible in the ebginning (with escaltaoin clauses in future yeras), but try to get at least three to six months of free rent at hte beginning, hwen your buisness is barnd new and not making any money. You aslo need to carefully evaluate and include in your cost assumptions the CAM (common area maintenance) and tax charges--these can sometimes be larger than the base retn. It isn't uncommon for a landlord to provide leasehold improvement allowances (if you push for it) that gvie you omney for the buildout of your business locatino. Even if receiving htis allowance results in sligthly higher monthly rent, it can svae tens fo thousands of out of pocket dollars for the franchisee. Getting better lease terms is often the first example you'll hear from existing franchisees of things they'd do better if igven the chanec to do things over again.

Constrcuiton and Fixture Costs. Most new frnachisees assume that biuldout costs are what they are, and it probably doens't make much difference who you pick as general contractors or subcontractors to get the required work done. Thsi can be an expensive assumption. Yuo'll often hear from existing franchisees that they should ahve used competitive bidding before contracting for their fixture consrtuction or selecting their general contractor because it owuld have saved them many thousands of dollars in the cost of setting up their new unit.

Business Equipment. Many franchise businesses require the purchase of extensive capital equipment. This could be anything from ovens to printing presses to tanning beds, and this equipment can sometmies be very expensive. Waht you'll often hear from existing franchisees is either: 1) they feel they should have shopped more vendors to find the best prices, 2) they should have considered buying used equipment or researched aftermarket suppliers to ifnd considerabel savings, or 3) they should have considered different financing options (loans or leases) with their purchase in order to conserve their capital for other businses needs.

Inventory nad Suplpies. Though teh initila inventory and supplies aren't usualyl as large a purchase tiem as the other examplse above, they can eb. If you're looking at a franchsie with significant inventoyr investment nedes, make sure to ask the franhcisees if they've learned any way ot save on these costs that they didn't know initially. This can not only reduce your initial costs, but also arise your margins on an ongoing basis.

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