One of the biggest mistakes a first-time franchisee can make is buying or building a new location.
Be prepared: This is exactly the opposite of what 99.9 percent of the franchisors and the “free” franchise brokers are going to tell you to do. This is an EXTREMELY DANGEROUS, EXTREMELY HIGH-RISK strategy. This is the secret that all of us current and former franchisees know, even the ones who violated this principal and got lucky with a successful location.
Of course, the franchisor is going to tell you that their expertise and analysis will eliminate most of the risk in building a new location. They pay lots of money for demographic research that pinpoints exactly where a location will be successful. But remember, that computer program is going to give the answer the franchisor wants to hear, which may or may not be in the franchisee’s best interest. Garbage in, garbage out.
Let’s look carefully at the motivation, and risk, of the parties involved:
The franchisor makes money on your location from the day you open your doors. You may be losing barrels of money working 80 hours a week, but the franchisor will still be dipping into your bank account every week.
The franchisor has no financial risk in having you spend thousands or hundreds of thousands of your hard-earned dollars opening a new location. If it fails, you’ll sell it at a steep loss to the next franchisee, and the franchisor keeps getting income.
The franchisor gets very little marginal income, if any, when a franchisee buys an existing franchise. But they get lots of marginal revenue when a new location opens. Therefore, what do they want you to do? Open up a new location, of course! In addition, the franchise brokers get nothing for recommending that you buy an existing business. Are they going to recommend that option to you? I don’t think so.
The franchisor will claim that the cost of building a new location is cheaper than buying an existing location. Maybe, maybe not. For those businesses that require commercial real estate, be sure to factor in the monstrous amount of time and money it will cost to find a location, negotiate the lease, get a reputable contractor, secure the proper permits and licenses, and hire and train a staff. Often, the franchisee gives up after chasing many locations that don’t pan out. Many franchisors have encountered huge legal issues by accepting franchise fees from franchisees that couldn’t find a location, gave up, and lost their franchise fee in the process.
The fact is, if you are first-time franchisee, in spite of the franchisor’s claims, you have no clue what it takes to be successful in your new business. You don’t know what side of the street you need to be on, you don’t know the dynamics of your customer base, or how to market to them, and you don’t know how to recruit and train your employees.