Top 10 Financial Mistakes Franchisees Make

Whether you are opening a new franchise or even adding a new location, here is a list of things you just should not do!

1. Do not waste your money and time on an unreliable franchisor

Most franchisors are excellent companies dedicated to your success and will help you every step of the way. But there are a few who could be ‘bad apples’ in amongst the barrel of plenty of good ones. It is excessively important that you check out any company that offers a franchise opportunity. This can be done by chatting to other franchisees and inspecting the franchisors UFOC document thoroughly. Never sign anything until you have fully reviewed and understand the UFOC. If the franchisor is dishonest and untrustworthy, the success of your franchise does not stand a chance.

2. Do not start too late

If you only start your search for finance after you have signed the franchise contract and you have already obtained real estate and started construction, you have made a fatal mistake. You need to learn the amount you require and start your finance search as soon as the idea of franchising has popped into your head. Do not search for the perfect franchise and sign the contract if you do not have the financial requirements.

3. Not looking beyond banks and the SBA

Certain financial institutions may require you to make a large down payment and the loan approval process could be extremely frustrating. In addition, SBA loans also present timing and paperwork challenges. Therefore, explore other options. There are a large number of independent financiers many of whom specialize in fields such as franchising.

4. Do not assume that an interest rate is an interest rate

Banks give their best interest rates to their best customers. That probably will not include you! Banks will usually offer you a ‘prime plus’ meaning that it is the prime plus a mark-up. Your rate will most likely be based on prime and therefore it will rise or fall with the prime rate.

5. Do not pay in cash

Why? Because if you utilise your cash, you are depleting the cash reserves you may require for another project opening or additional build-out. Leveraging assets is crucial. If you finance your purchase, interest and finance charges you acquire may be tax-deductible business expenses that will reduce tax liability.

6. Do not borrow money from a stranger

Borrowing money from even the most decent financial institution at times could be like borrowing from a stranger if they are not familiar with the demands of the franchise industry. If you have never opened a franchise before, you will want someone who speaks your language and knows about franchising.

7. Do not be overly optimistic

To avoid being unrealistic about potential sales volume and expenses, make sure you perform every study or interview and do lots of research. Always expect unexpected expenses! It will happen.

8. Do not neglect the business plan

Opening a franchise without a business plan is like driving to a new place without a roadmap. You will definitely make wrong turns! However, your business plan will prevent this from happening. It typically addresses start-up costs, sales projections, demographic studies, utilities, labor and supplies expenses etc.

9. Do not overlook market research

Your sales and income potential depends greatly on the market research. It is very important that you are informed of the demographics of the area in which your franchise will be set up in. You need to know whether the demographics of the area will support your franchise or whether there is a lot of competition. Poor location is one of the biggest contributors to store failure.

10. Do not keep abysmal financial records

If you have been running your successful franchise for a couple of years, there is no excuse for not being able to produce real financial operating statements to prove income and cash flow assertions. Perhaps you may want to expand your franchise business or add a location. If so, you need to be able to demonstrate that your business is healthy and has the cash flow to support new debt.

If you adhere to these “don’ts”, it can aid towards the success of your franchise business.

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