A Certain Trait Franchisors and Franchisees Can Share
by Ed Teixeira
Read about a trait that both franchisors and franchisees can share.
There is one trait that some franchisors and franchisees share and itís not a
positive one. Itís a case of being undercapitalized and not being able to do the
things that will lead to success. Although there are situations where a new
franchisor or franchisee is able to overcome a lack of working capital, this is
usually the exception and not the rule. There is a similarity to this situation
that is common to both parties, and it has to do with the start-up phase.
The Franchisor Situation:
In the case of a new franchisor the problem is often caused by spending the
majority of their franchising capital on constructing and launching the new
franchise program without the existing human resources, marketing programs or
added capital needed to recruit and support new franchisees. As a result the new
franchisor is ready to go but lacks the resources to grow and administer their
franchise program. There are franchisors that are able to overcome this problem
and grow their franchise network as a result of hard work and creativity.
However, in most cases the result is a stagnant franchise system that fails to
Suggestions for New Franchisors:
- Select the most competent and reasonably priced consultant
and attorney for constructing the new franchise. Donít be
impressed by the sizzle. The most important components of a new
franchise are the franchise documents, operations manual and
consulting services. The total cost for this can range in cost
from $40,000 to $100,000. If the cost is on the high end it
should be because the franchise is complex not because the
consulting company claims to be the best at what they do. You
could be paying for a top heavy consulting staff and for the
firms advertising and marketing costs. A competent and highly
experienced franchise attorney is as important as the franchise
- Tailor your franchise development strategy to your
resources. A franchise launch can be started close to home where
the cost to recruit qualified prospects and supporting them can
be done by using current staff. After the first 5 or so
franchisees are on board franchise development can branch out.
- Consider investing in modest franchise marketing materials.
More and more franchisors provide their franchise recruiting
materials on line. This environmentally friendly process and can
save thousands of dollars in materials and printing costs.
Suggestions for New Franchisees:
- After identifying the most attractive franchise
opportunities that match your business and financial profile be
sure to identify the franchise start-up investment. Recognize
that Item 7 in the Franchise Disclosure Document represents an
estimate of costs and the additional capital line is for three
- Speak to as many franchisees as possible in order to
identify their experience regarding the franchise investment and
how long it took them to reach break even.
- Do not invest all of your available capital in the franchise
start-up phase. Chances are youíll need more capital once youíre
up and running. If you exhaust your initial working capital and
donít have an added source of capital you will find yourself in
trouble unless your franchise has an extraordinary start.
- Ask any franchise expert about why franchisees fail and
being undercapitalized will be at or near the top of the list.
Franchisors and franchisees that lack sufficient working capital to launch
their franchise could be headed for trouble. With a limited amount of capital
the opportunity to overcome unforeseen events could be fatal to the franchise
operation. If there are doubts then either wait until you have more capital or
© 2011 FranchiseKnowHow, LLC
Ed Teixeira is the President of FranchiseKnowHow, LLC. He can be reached at