Many interested entrepreneurs dream of setting up their own franchise. That’s because it’s a highly lucrative avenue – one that lets them leverage an existing brand’s equity to win. But the challenges of running successful franchise businesses often take the majority of them by surprise.
Do Franchise Owners Face Challenges?
On the surface, owning a franchise seems like a straightforward business proposition. You don’t have to establish a brand from scratch. You don’t have to think about how to make your brand memorable and you don’t need to work on the basics because those are already in place.
Instead, you own an already established brand with a strong marketing muscle. That being said, successful franchisees overcome a host of challenges before they become profitable. Some of these challenges include understanding and adhering to the franchise agreement, managing costs, hiring and retaining skilled staff, and ensuring strict regulatory compliance.
- READ MORE: See our Franchise Guide
Challenges Faced by a Franchise Business
A number of factors must work in your favor in order for your franchise business to succeed. Deciding on the right franchise locations and choosing the right franchisees are just some of the things you must keep in mind.
Let’s now take a closer look at some of the challenges franchise business owners tend to face.
High operating costs
Getting the franchise business off the ground requires you to spend money. And you’re going to need quite a bit. To give an example, a Taco Bell franchise will cost anywhere between $1.2 million to $2.9 million plus $45,000 as a franchise fee.
Some brands also require aspiring franchisees to have a considerable amount of money on the table when they come to talk. This is important from a franchisor’s perspective as it indicates the new franchisee’s ability to scale up when needed. For small-time entrepreneurs, however, this requires a lot of work before stepping in to discuss franchise agreements.
Building a stable infrastructure
A common franchise problem is building a solid infrastructure. New franchisors find this especially hard because it takes time and effort. There are various things that need to be factored in to make sure you have smooth business operations.
As a franchise owner, having a robust support system from the corporate office is crucial for the success of your franchise business. This support system includes a dedicated team that provides guidance and assistance to new franchisees, as well as ongoing support to existing franchisees. A well-structured corporate office support system can help franchisees navigate the myriad challenges of running a franchise business, including financial management, marketing, and operational issues. With the right support, franchise owners can focus on growing their business and achieving long-term success.
High employee turnover
In comparison to other businesses, new franchisees face a considerably higher employee turnover rate. This is especially true for the restaurant industry which sees about a 75% employee turnover rate.
Given the importance of great customer service in the franchise business, the high employee turnover presents a bigger challenge for business owners. What makes this even more complicated is the fact that good employees are almost always in high demand. Since they can easily find employment elsewhere, it’s difficult to retain them for a long time.
Maintaining brand consistency
Being so closely associated with a well-known brand may sound like a great idea for your business, but it has its share of challenges. Branding, for example, is one area where you will have limited control. Moreover, any slight bit of controversy surrounding another franchise of the same brand may have a negative impact on your margins.
Long approval process
Franchisors rely on franchisees to elevate their brand. That’s why they typically have long and complicated processes in place before approving a potential franchiser. It’s also worth noting that franchise agreements tend to include 10-15 year contracts. In other words, a long approval process is normal before things start moving.
Succeeding locally
Researching the local community should be on top of your priority list when you consider setting up a franchise. This is important because your target audience will determine your success. So try to understand who they are, what they want, and why should they be interested in your business. While researching the location, it is also a good idea to analyze the competition and figure out what they have on offer.
Lack of autonomy
In many cases, entrepreneurs struggle with the idea of having less control over their franchise business because the brand essentially calls all the shots. For many business owners, this is a tricky situation to be in and often these businesses fail. What’s important to remember is that a franchisee and the franchisor are partners in a venture. They have the same goal to achieve success. There has to be mutual respect and a clear understanding of how the business will be run.
Building a strong team
Like any other business, a franchise has to have a solid team to gain long-term success. Keeping employees happy and motivated is crucial to stand out from the competition. It’s also important to keep training them on technology to better support customers.
Complex exit strategy
You may have a strong franchise business and it can still fail due to factors beyond your control. That’s why it’s important to be able to get out of it so you can minimize your losses. In some cases though, exiting the business may turn out to be more complex than you imagine. It’s also worth noting that different franchise systems have different strategies when it comes to exiting, often detailed in the franchise agreement.
Finding work-life balance
Owning a franchise cannot be a side hustle. It’s a full-time job and it involves the same pressures of running a company. To achieve success, you will have to pay complete attention to every little detail that can cause your business to fail.
Financial Challenges
One of the biggest challenges facing franchise owners is financial management. This includes managing cash flow, controlling costs, and ensuring that the business is profitable. Franchisees need to have a solid understanding of financial management principles and practices to make informed decisions about their business. Effective financial management is essential for the sustainability and growth of the franchise, and it requires careful planning and execution.
Lack of Capital
One of the most significant financial challenges facing franchise owners is a lack of capital. Starting a franchise business requires a substantial investment, and many franchisees struggle to secure the funding they need to get their business off the ground. This can be particularly challenging for new franchisees who may not have a proven track record of success. Without sufficient capital, franchise owners may find it difficult to cover initial costs, such as franchise fees, equipment, and inventory, which can hinder their ability to launch and sustain their business.
Regulatory and Compliance Challenges
Franchise owners also face a range of regulatory and compliance challenges. This includes navigating complex laws and regulations related to employment, tax, and consumer protection. Franchisees need to have a solid understanding of these regulations and ensure that their business is compliant to avoid costly fines and penalties. Staying up-to-date with regulatory changes and implementing necessary adjustments is crucial for maintaining compliance and protecting the business from legal issues.
Navigating Regulations
One of the biggest regulatory challenges facing franchise owners is navigating the complex web of laws and regulations that govern the franchise industry. This includes understanding the requirements of the franchise disclosure document, franchise agreements, and other regulatory requirements. Franchisees need to have a thorough understanding of these regulations and ensure that their business is compliant to avoid costly fines and penalties. Properly navigating these regulations is essential for the smooth operation and long-term success of the franchise business.
What Is the Biggest Challenge Faced by New Franchisees?
The biggest challenge, by far, for new franchise owners is to secure capital to set up their business. Although franchisors support incoming franchisees with training, they expect them to meet certain criteria before approving their request. Having sufficient capital in the early stages is therefore imperative to succeed.
When Is It Time to Contact the Corporate Office?
As an aspiring franchise owner, you should have the basics in place before contacting the corporate office of your franchisor. A clear business plan and proper financing are some of the things that should be secured before moving ahead.
What Are the Biggest Risks of Franchising?
Some of the biggest risks of franchising include putting money on the table before you have set up your business, securing enough capital for getting approval and understanding the obligations outlined in the franchise agreement, and potential damage to your franchise caused by factors that are beyond your control.
Is Starting a Franchise Business Worth It?
Despite all the challenges, starting a franchise business is a highly rewarding experience. With the right team, a supportive franchisor, and a clear vision for your company you can turn things around.
READ MORE:
- See our Franchise Guide
- Franchise Financing Options
- What is a Franchise?
- What are the Pros and Cons of Franchising?
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This article, "Challenges Faced by Franchises" was first published on Small Business Trends
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