The Quickest Ways to Shred Your Investment…and How to Avoid Them

Expensive mistakes to avoid as a new franchisee.

The Quickest Ways to Shred Your Investment...and How to Avoid Them

They say that wisdom comes from experience and experience comes from making mistakes. How true. But rather learn from others than pay the cost of learning from your own mistakes. These mistakes represent real money, and avoiding them can make a big difference in the total investment you need for your new business, and ultimately how profitable the business becomes.

Franchise companies will almost certainly have manuals, training programmes and other support documents and services designed to help you avoid making costly mistakes. The challenge is that most new franchisees haven’t got the motions down pat. In the process of trying to learn and execute many new things at once, they sometimes make what they feel are logical decisions without consulting all the advice provided by the franchisor.

Knowing what you know now…

During your due diligence conversations with existing franchisees in the system, it‘s always a great idea to ask them if they made any expensive mistakes when they were first building or operating their new business. A good form for this question to take is: “Knowing what you know now, what would you do differently if you got to start all over again in building your business?”

Most existing franchisees will have a number of suggestions based on their personal experience. By looking for common denominators in this feedback, you can determine the areas of greatest opportunity for avoiding common mistakes that cost others money they didn’t need to spend.

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

1. Lease terms
Most franchise businesses operate out of leased space, typically in a retail environment. The total cost associated with this real estate often represents one of the largest investments you make in setting up your business. A number of economic factors are involved in the negotiation of a lease that can make a big difference in the timing and your total costs.

The first of these is the base rent. You want to not only get this factor as low as possible at the outset (with escalation clauses in future years), but try to get at least three to six months of free rent at the beginning, when your business is new and not yet making any money.

You also 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 rent. It isn’t uncommon for a landlord to provide leasehold improvement allowances (if you push for it) that give you money for the shop fitting of your business location.

Even if receiving this allowance results in slightly higher monthly rent, it can save tens of thousands of out of pocket rands for the franchisee.

2. Construction and fixture costs
Most new franchisees assume that shop fitting costs are what they are, and it probably doesn’t make much difference who you pick as general contractors or subcontractors to get the required work done. This can be an expensive assumption.

You’ll often hear from existing franchisees that they should have used competitive bidding before contracting for their fixture construction or selecting their general contractor because it would have saved them many thousands of rands in the cost of setting up their new unit.

3. 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 sometimes be very expensive.
What 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 find considerable savings
  3. They should have considered different financing options (loans or leases) with their purchase in order to conserve their capital for other business needs.

4. Inventory and supplies
Though the initial inventory and supplies aren’t usually as large a purchase item, they can be. If you’re looking at a franchise with significant inventory investment needs, make sure to ask the franchisees if they’ve learnt any way to save on these costs that they didn’t know initially.

This can not only reduce your initial costs, but also raise your margins on an ongoing basis.

5. Marketing costs
Almost every new franchisee will tell you that they wasted a lot of money in relation to their initial marketing efforts. The most common mistake is that the franchisor can be quite specific in laying out a marketing plan for new franchisees to follow – complete with budgets down to the cent.

What many don’t anticipate is that every local market advertising sales person is going to descend on you as they do on all new business owners. They’re going to do their best to convince you that the plan the franchisor has put together (based on successful experience with dozens of new unit openings) is flawed and that you need to modify it to feature whatever it is that the sales person is selling.

Make sure you are confident that the franchisor has the experience to help you put together an initial marketing plan that will work – and then follow it to the letter.

6. Labour costs
The largest ongoing expense line for almost all franchise businesses is the cost of labour. All good franchise companies will have specific guidelines for what personnel you need and how much you can afford to pay for these positions.

A common mistake new franchisees make is to hire too many people or to pay too much for hires. This is a very easy mistake to make, but it’s also the quickest way to change a business from a winner into a loser from the standpoint of profitability. It takes discipline and focus to stick to the plan in terms of labour, but it can make all the difference in the long-term success of your business.

Jeff Elgin
About the Author
Jeff Elgin has developed a consulting system that matches pre-screened, high-quality prospective franchisees with the franchise opportunities that best fit their personal profile.

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