So you’ve got the bug to start your own business, but you are hesitant to start from scratch. Purchasing a franchise may be a good move for you, but beware that you do not fall victim to the “Top 8 Franchise Startup Myths” that catch many entrepreneurs off guard.
A franchise, just like an independent small business, can fail. Success depends not on the franchise name and size but on the business savvy of the franchisee. So, to help you decide if becoming a franchisee is the right decision, let’s dispel the following eight myths about purchasing a franchise.
Myth 1) Getting a Loan Won’t Be a Problem
Though a franchise may have a track record of success, bankers today are still hesitant to loan money for startups, even if you have good credit. Small Business Association (SBA) lenders, however, are a good resource in the current economy. It is also a myth that you have to invest $100,000 to become a franchise owner. There are viable low-investment franchise opportunities available. Just beware of low-cost, fly-by-night franchise scams.
Myth 2) Competition Is Bad
Entrepreneurs often believe that a protected territory means no competition. You might be protected from the franchisor placing another franchisee or a company store in your territory, but other competing businesses will surely be there. But don’t panic. Competition can actually strengthen your business by forcing you to improve operations and service. Close proximity to your competition may even attract additional business by creating more awareness, boosting demand in your area, and providing you with an opportunity to differentiate your products and services.
Myth 3) Bigger Always Means Better
A franchise may be large, but that does not always mean it offers quality products or superior supports. A franchise can grow quickly because of effective marketing, aggressive sales managers and huge payments to consultants to push a brand, but a truly successful franchise will increase in volume because it offers a good product or service, as well as hands-on support to its franchisees. The only way to determine the viability of a franchise is to contact franchisees and ask how much support they receive from their franchise headquarters. Then compare competing franchises to see how their systems are working ― or not working.
Myth 4) Never Be the First Franchisee in a System
This sounds prudent, but it really depends on the system and the franchisor. If the system is built simply on a concept, and the franchisor has never actually worked the model, this might be a red flag. Do you really want to test their concept on your dime? However, if the franchisor has been operating the system successfully for years, and the product or service is in a growing market, the first franchisees will enjoy a superior level of support. After operating for years, the franchisor has worked the bugs out of the system and should be able to help you replicate their success. In addition, franchisors often provide extra incentives and support to the first franchisees.
Listen to Rick Bowman's instructive and revealing interview in the accompanying podcast: Franchise Myths.
Myth 5) I Don’t Need to Hire an Attorney or Accountant
Accountants and attorneys should be consulted before you sign any legal or financial business documents. This is somewhat like buying a vehicle before you drive it. You can usually hire an attorney to read franchise agreement documents and disclose any problematic areas for less than $500. You can also afford a good accountant or CPA if you look for someone in a one- or two-person firm.
Myth 6) A Popular Product or Model Always Guarantees Success
Ever heard of eBay retail stores? You don’t see too many anymore. Coffee houses are also experiencing severe revenue losses as more and more people are forgoing the $5 cup of joe. A safer industry is one that provides a necessary product or service that people either do not have the time, desire or means to make or perform themselves. The franchisor's product mix, training, support, marketing plan, site selection and, most importantly, how you follow that plan will be more important to your success than selling the latest niche product or fad.
Myth 7) Managing People Will Come Naturally
Be realistic about your management experience. If you have experience in personnel management, then this is one less hump to get over. However, if you are like most people, your experience is minimal and you will need training to manage people effectively. Management is not easy and if it is something you do not like to do, you might need to look in another direction for a business.
Myth 8) A Franchise is a Guaranteed Success
Any new business venture is a risk ― even a franchise. Franchises may enjoy a higher success rate than private businesses because they have an established name and business plan; however, success is ultimately up to your ability to operate a franchise and execute a business plan.
Bonus: Listen to the companion podcast interview of Rick Bowman for more details regarding common myths around purchasing a franchise.