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Franchising-The First Fateful Year

Written by : Lori Karpman
The first year of business poses many challenges, even for the most experienced of entrepreneurs. In buying a franchise however, one would assume it would be easy, after all, you have bought a system with standards and procedures in place designed specifically for the franchisee to follow so it should be a breeze right? Wrong! Like any first year of business there are many challenges to overcome. As a general rule, franchisees do not have previous business experience and the systems provided by the franchisor cover the operations as related to the daily business once opened and the use of the brand. The knowledge on how to set up, organize and deal with your business as a “business owner” can only be learned hands-on. I sat down recently with Frederick Wardini, a successful franchisee and owner of 2 franchised retail stores, in their 3rd and 1st year of operation respectively. I have purposely left out the name of the brand as his experience is common to any system. I asked him about his first year experience and what he would advice he would give to new franchisees in or about to enter theirs.

Lori: What would you like to have known/wish you had known about franchising and the purchasing process?
Fred: I wish I would have done more research on the franchisor to truly understand the workings of the system more in depth. I would have liked to understand the real challenges that the franchisees face on a day to day basis, to comprehend what they are experiencing and to determine if these challenges could be overcome based on the efforts I was willing to invest.
I also feel that I would have liked to have known more about the franchisor’s definition of “support” and know in concrete terms exactly what and when services are provided. I would have spoken to more existing and past franchisees if I had to do it all over again.

Lori- what is essential to take away from Fred’s experience is that you must do all your homework. Existing and past franchisees are an excellent source of information on “what exactly you are buying”. A well structured, franchisee centered system, will make that first year easier by providing the structure and support you need to face the challenges of the business world. It is important to find out how franchisors deal with franchisees in distress and what kind of support is provided to assist them in these times.

Lori: What is the first year of franchising like?
Fred: Learning all aspects of how to run a business at one time is very difficult. You must learn to order, manage inventory, hire and fire staff, deal with suppliers, manage customer relations, carry out marketing plans, do some accounting work and follow the rules set by franchisor. You have gain knowledge and adapt quickly to the franchise system. It all comes at once and you have to integrate all this information. It often feels overwhelming. For the first 3 months or so, I felt like I was in a cloud. But over time, it all settles in and becomes easier.

Lori-What is important to remember here is that most new franchisees, like Fred, are not former business owners. Franchisors know this and in fact, it is exactly for these individuals for whom franchising is the best model of business opportunity. The individuals need all the tools and structure that franchising provides. Without this part, the first year, and many thereafter, would be disastrous as they would also have to invest time and money to develop the concept, the marketing plans, the new recipes etc…Franchising allows them to concentrate on learning and running the business while the franchisor provides all the tools that make the concept work, requiring them only to implement.

 Lori-What are the biggest challenges of the first year?
Fred: The first year is challenging and requires hard work and dedication. You have to stay focused and disciplined. The biggest challenge is in managing all aspects of a new business, such as: achieving sales targets, balancing cash flows, motivating and managing employees, and providing the best customer service. In retail, customer service can be the most difficult thing to learn sometimes and is the hardest thing to train your staff to do well. You never want a customer to leave your establishment unhappy. Lots of businesses fail to realize how much damage that does to their business in the long run. Some customers though you really do not want back!
Labour could be a factor too depending on your industry. We had a hard time finding people to work in our store at first.

Lori: Fred’s labour point is very well taken. It is important to assess what the labour needs will be in the franchise you buy. Will there be a pool of labour readily available to you? Is it minimum wage or do you need skilled labour? How many people do you need? Before all, you must be comfortable hiring and firing staff as labour cost is one of your most controllable variable costs.
Mismanaged, this cost can result in losses of substantial amounts.

Lori- What sacrifices did you have to make?
Fred: You tend to work long hours including evening and week-ends. In retail you have to expect this as you must work the hours of the mall or location that you are in. What we did not realize is the amount of hours we would work outside of store hours doing training of our staff, bookkeeping, ordering etc…There is a lot of administrative work to do no matter what franchise you buy. It is the same in any business. Our social life was seriously affected for the first year. As well, the income is very low for the first few years as you make a lot of mistakes that cost money, and you are repaying debt. Fortunately the mistakes are learning experiences that you recover from.
Lori-What I always recommend to prospects is that they ask these quality of life questions up-front. What will be required of me outside of general business hours? Will I be required to take continuing education classes or attend seminars? And if so, at whose expense? It is very important to assess what impact this business will have on your quality of life and to what point you are willing to make those sacrifices. Quality of life should be an important consideration in the decision making process.
Lori: What were the surprises?
Fred: I found that neither the sales figures nor costs were necessarily in accordance with the figures projected by franchisor. There are many variables. This is why in depth financial analysis is crucial. I would have asked other franchisees what their costs were and what their financial experience was and how close it came to the projections they had seen when they bought their franchise. Again, I would ask as well what kind of support the franchisees were getting when their financial performance did not measure up. The franchisor support may not equate to the same level of support you anticipated.
Lori: What were the good points that you didn't expect?
Fred: As I stated above, you are constantly being forced to learn about the different aspects of running a business. Having to do this made me grow as a person and provided a hands-on experience that could not have been learned through school. I have a tremendous new skill set that has allowed me not only to successfully develop my first store but to acquire a second.
Lori: What did you not see coming?
Fred: How rewarding it could be….
Lori: That’s the beauty of franchising. I have been working with this business model for over 15 years and have seen thousands of people become successful business owners who otherwise could not. In franchising, the franchisor provides all the tools and the framework within which to work. You have to provide the basic skills to implement the plans and work with the tools, within the context of the system. The desire to learn, willingness to work hard, and passion for the industry are crucial for success. The sense of confidence and accomplishment to be gained in return is immeasurable.
Lori: When did you feel comfortable?
Fred: After a year of experience I started to feel much better about dealing with suppliers, employees, customers, and managing the business as a whole. After the first year I felt as though I had at least seen everything, and was comfortable that nothing would come up that I could not handle.
Lori: What did you wish you had asked/evaluated?
Fred: I wished I had asked:

  • More existing franchisees about the challenges encountered with the franchise system as a whole and with the franchisor. That being said, I would then have evaluated if I could live with these challenges and if it was worth investing my time and money to overcome them.

  • How much cash flow is really required since it was definitely more than what was anticipated. (3) For more information on the location proposed. The location should be compared to similar existing franchises, and demographic and regional information, including traffic counts, on the selected location being offered should be provided.

  • For a list and explanation of hidden costs. I was not aware for example that we had to pay for certain items from our franchisor. I also wish I would have known and understood more about the costs and implications of hidden expenses such as employee turnover, poor inventory control and theft.

  • Lori-Fred’s last point is very important, not to minimize the importance of those before. Hidden costs can be enormous. Ask the franchisor in particular about marketing materials and their cost to you. As well, find out about testers or samples if you are in retail, and ask how volume rebates and supplier discounts are treated in any product business. With respect to the other form of hidden costs such as labour and inventory management, these can be substantial as well. Many of your costs are fixed (ie: rent, utilities, etc..) so you want to closely control your variable ones as these are where the savings are achieved and these savings fall right to the bottom line and into your pocket.

    Lori: What would you want a new franchisee/prospect to know that you didn't or wish you had?
    Fred: To ensure that the franchisor has made all the necessary arrangements and modifications required to adapt the concept to the market if you are the first franchisee or early entry in a new market. To ensure that there is a solid marketing plan in place for the brand, and to find out what has been designed for your territory to support your business in this new marketplace.

    To do a lot of research on the franchisor and ask targeted questions of the other franchisees.
    Lori-I am certainly with Fred here. I believe in asking very targeted questions of all parties. Franchisors lead franchisees to believe that they are the ones in control of the sales process when in reality it is the franchisee. After all it is the franchisee who has the money and is making the decision to invest (or not!) in the franchisors system. While you will never be 100% sure, do not buy anything until all of your questions have been answered to your satisfaction. This does not mean you will like all the answers. It means that you are aware of all the risks and have decided that you are willing to take them. The franchisee should set the pace for the sales process and should not feel pressured by the franchisor. Satisfy yourself that the franchisor has a solid growth plan and is financially stable enough to implement it, and that the principles believe in the concept and are passionate about it. Then, ensure that you have the same definition of support and have it confirmed by other franchisees.

    Lori: Any pearls of wisdom for a new franchisee in their first year of operation?
    Fred: Watch your cash flow and manage your hidden costs!

    Lori: Franchising is ultimate business model in my opinion. It provides individuals with a structure and a framework within which to use their unique talents to build their very own business. It removes the responsibility of creating a brand and a strategy for that brand, as well as continually updating it be it via weekly specials, or offering of new services, from the individual business owner. By providing operational, marketing, merchandising, leasing, and various other forms of expertise, franchising allows the franchisee to concentrate 100% of their efforts on implementation, which is, building the business. This is the greatest recipe you can get for success. I do believe that the first year of business is a challenge for anyone, but I also believe that franchising most definitely increases your chance of success. According to statistics, 80% of independent (non-franchised) businesses go bankrupt within in 5 years. In that same period, 80% of franchised businesses are still in operation. I think the numbers speak for themselves!
    Wishing you the best of success and an easy first year,

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