3 Biggest Challenges in Franchise Development

The world of franchise sales has no shortage of challenges — convincing someone to invest their life savings in a business started by someone else certainly isn’t easy. And as franchisors look forward to a post-COVID world, it has never been more important to keep those potential challenges in mind and prepare accordingly. Here are three of the most common difficulties in franchise development right now. 

Finding the Right Candidates 

The long-term success of any franchise business rests on the quality of its franchisees. Emerging franchisors often feel pressure to market to the largest number of people or sign the first prospect who shows interest. 

“A common mistake emerging franchisors make is taking the first person who is willing to write a check,” said FranNet vice chairman and principal Blair Nicol, CFE. “That is the wrong thing to do — the first few franchisees will be the validators for future franchises.”

This hasty strategy can also be a costly mistake in the long run as the wrong franchisees can slow down growth for the brand or create unnecessary challenges. Franchisors should do their due diligence and outline their ideal franchisee profile to be more discerning when evaluating prospects. 

“Initially, you have to find extremely strong franchisees that are also going to have a passion for the brand,” said BizFranHub co-founder and managing partner Jonathan Pace. “They need to be your brand ambassadors — spokespeople who are going to tell the next wave of franchisees how great the opportunity has been. If franchisors go out and spend a ton of money on large-scale, generalized marketing campaigns, they might end up with franchisees who have the money to invest but might not have the real passion that will drive growth to 100-plus franchises in the future. Don’t be so eager to sell those first few franchises.”

Inadequate Support Structure

Franchisors can’t overestimate the importance of having a strong support infrastructure and a replicable business model in place. Although they are entrepreneurs in their own right, franchisees choose to franchise because they want (and need) those support systems, processes and procedures. Often, franchisors may enjoy a fast influx of new signings in the beginning but don’t have the infrastructure in place to support that growth. 

“Prospective franchisors need to create a system of procedures and operations that somebody else can follow,” said Nicol. “It may not be polished or totally complete, but they need to document how the business started, how it should be run, how it should be staffed and more.”

For example, an operations manual with product lists, employee handbooks, vendor tips, storefront appearance guidelines and more will need to be provided to each franchisee. From there, emerging franchisors need to hire a good, tenured corporate support team to provide ongoing support and training to all new franchisees. They also need to be aware of how far away they can realistically stretch that support. 

“From a support level, young franchise brands also need to grow around where they are based,” said Nicol. “If a franchisor is based in Portland, Oregon, for example, the first few franchisees need to be in the Pacific Northwest to promote regional growth.”

Insufficient Funds

Franchising a business is expensive; there is no way around it. This barrier to entry is one of the most common challenges in franchise development. In general, franchisors can expect to pay at least $100,000 in legal fees, operation manual costs, trademarking, training, registration, FDD creation, marketing and more before they ever sign their first franchisee. Most business owners who have only opened up one store may not have that kind of capital lying around to spend.

New franchisors may also underestimate these costs, especially in the initial stages of growth of the brand. Additionally, franchisors need to have some financial wiggle room, as it will likely take a while to recoup the initial costs outlaid in launching the franchise. Without the proper capital, the franchisor can wind up with no funds to support the next stage of expansion.

“Typically, a franchisor does not become royalty sufficient until around 75 to 100 open units,” said Nicol. “That means it takes quite a bit of capital to create and grow a franchise successfully. Sometimes a franchisor will also hold on to their pilot location for too long. Oftentimes, franchisors will need to sell their pilot location and use those funds to focus on the franchisor side. ”

With the right plan in place, franchising can increase a company’s revenue through franchise fees and royalty payments paid by the franchisee, as well as expand brand recognition as the brand reaches new markets and customers. But up-and-coming franchisors should be wary of these common challenges and ensure they are truly ready to embark on franchise development.