Some Business Advice for a Newly Minted Franchise

By Cliff Ennico

March 25, 2014 6 min read

"We have just set up a new franchise for our fast-food business.

"We have followed all of the necessary steps — preparing a Franchise Disclosure Document, filing it with the Federal Trade Commission and state regulators, and contacting the major networks of franchise brokers — but we're having trouble attracting new franchisees.

"Our management team is highly experienced in this type of business, but we don't have any franchise units set up as yet, and that is making some people nervous about buying our franchise.

"Is there any way we can overcome this problem? We really, really believe the franchise concept is a winner."

Wait a minute, wait a minute. You are telling me that you have spent tens of thousands of dollars setting up a franchise but haven't tested the concept in even a single location? How do you "really, really" know the franchise concept is a winner? Why should anyone buy your franchise when you can't back up your claims to success with even a single number?

Open Some Company Stores. You should open two or three stores right away to test your concept before you start offering them to franchisees. I frequently advise my franchisee clients that company stores are a good thing — yes, they may compete with you, but they give the franchise an opportunity to test new products and services without using their franchisees as guinea pigs.

Your company stores will give you performance data that you can use to persuade future franchisees that you've got a winning concept. And you can always sell the stores to franchisees later on when the franchise has proven itself.

Look for Highly Entrepreneurial Franchisees. The typical franchisee today is a downsized corporate executive in his 40s, 50s or 60s who has never run a business before and can't afford to blow his retirement savings on a bad investment. This type of person — while possibly an ideal candidate for a more established franchise — is a terrible choice for an early stage franchise that hasn't yet proven its concept. They require lots of hand holding, and their expectations will be quite high. Fail to meet those expectations, and you will be sued. Guaranteed.

Until you have about 30 franchisees, your candidates should be highly entrepreneurial individuals who (ideally) have run businesses of their own before and can help you identify weaknesses in your franchise program. Yes, they can be quite independent and headstrong sometimes, but in the long run your franchise will be stronger because of them.

Offer Your Franchisees Incredible Deals. Anyone who buys your franchise at this time is "rolling the dice in Vegas," so make his upfront investment as low as possible. If you are charging more than $20,000 as your initial franchise fee (the fee the franchisee pays just to get the territory and his initial training), that's too much. Encourage your early franchisees to buy as large a territory as possible, and offer steep discounts for franchisees who buy multiple territories or a master franchise (usually an entire state).

Keep your franchise term short (five years or less). That way if your franchise becomes wildly successful you can raise your early franchisees' royalties and fees when they renew their agreements.

Keep Your Friends Close and Your Franchisees Closer. Once you have a franchisee or two, monitor them closely and communicate with them frequently. Make sure they have as positive an experience as possible, and jump on any problems they may encounter.

Arrogance kills early stage franchises: Your franchisees probably know as much or more about their territories than your management team does. Treat your franchisees like family members (albeit sometimes dysfunctional ones) and be humble when dealing with them; they usually will repay you in kind.

Be Flexible. If a franchisee believes the franchise model is not working in his territory, and can back that argument up with solid evidence (for example, he has followed the franchise model closely and has not achieved any sales after 6 or more months in business), be willing to modify your program to ensure that the franchisee's experience turns around.

Always remember that the cost of living and doing business, taxes and government regulation of business vary widely from state to state, and between urban and rural areas of the country. A franchise that works beautifully in Cornflake, Mont., may have zero traction in Los Angeles and New York City, and vice versa.

If two or more of your franchisees are having similar bad experiences, it may be time to rewrite the entire franchise program. Just keep your franchisees' conversion costs to an absolute minimum.

Let Your People Go. If a franchisee decides to throw in the towel, make it easy for him. Throw away your franchise agreement, and let him cut his losses as long as he releases the franchise from liability and agrees not to engage in a competing business or disclose your trade secrets.

Cliff Ennico ([email protected]) is a syndicated columnist, author and former host of the PBS television series "Money Hunt." This column is no substitute for legal, tax or financial advice, which can be furnished only by a qualified professional licensed in your state. To find out more about Cliff Ennico and other Creators Syndicate writers and cartoonists, visit our Web page at www.creators.com.

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