FRANCHISEE COMMON MISTAKES

Understanding the past mistakes of other franchisees can assist you in avoid those mistakes and the potential harm that comes from them.

Contact Neufeld Legal PC for franchising legal matters at 403-400-4092 / 905-616-8864 or Chris@NeufeldLegal.com

Although many of the legal issues and aspects of legal consequence that can result in serious mistakes being made by a franchisee are highly specific to the particular facts and circumstance of the individual franchisee, there are broader common mistakes that franchisees have all too frequently made and from which you can learn from in advance, such that you might avoid, or at least limit, the potential harm that can befall a franchisee that makes these broader common mistakes.

A. Inadequate Due Diligence and Preparation

• Failing to Conduct Proper Research: Focusing only on the brand name and failing to investigate the franchise's financials, the local market, and the competition. Although the franchise disclosure document provides important information, it is a highly sanitized document that drafted to best serve the franchisor, such that it is important to pursue information that the franchisor doesn't necessarily want to disclose or is otherwise significant to the prospective franchisee.

• Underestimating the Financial Commitment: Only considering the initial franchise fee and overlooking crucial costs like build-out, equipment, inventory, marketing, and, most importantly, working capital (cash reserves) needed to cover expenses until the business becomes profitable. The financial cost of most franchises are far greater than what most prospective franchisees anticipate, with the information provided in the franchise disclosure document and commercial publications as to franchise start-up costs tending to only set out the basic costs involved.

• Skipping Professional Guidance: Not hiring an experienced franchise lawyer to review the disclosure document and the franchise agreement - together with directing you on potential due diligence investigations that should be undertaken, and a financial advisor/accountant to help with cash flow projections. Experienced professionals should push you to critically review the franchise business prospect, such that you might assess its appropriateness, given their own perspective from having dealt with franchises, at various phases of the franchise's business cycle, which are oftentimes unfavorable, such that important insights can be provided.

• Ignoring Current Franchisees: Not speaking candidly with enough existing franchisees about the day-to-day operations, the franchisor's support, and the actual profitability and challenges. Most provincial franchise legislation requires the franchisor to include the contact information for current franchisees, such that prospective franchisees might speak with them in advance of proceeding with the particular franchise venture. The information about former franchisees is also worthwhile investigate, understanding that the franchisor has sought to sanitize the information that is included in the franchise disclosure document.

B. Operational and System Mistakes

• Deviating from the Proven System Too Early: The value of a franchise is its established, proven business model. Franchisees often make the mistake of trying to "get creative" or change the core system before fully mastering it, which can undermine the brand's consistency and success formula.

• Poor Staffing and Training: The business is highly dependent on its team. Mistakes include hiring the wrong people, skimping on thorough training, and failing to manage and retain quality staff. Many franchise systems are heavily dependent upon their employees, such that all aspects of employee hiring and retention need to be given the appropriate emphasis in the development and management of the franchise.

• Neglecting Local Marketing: Assuming national advertising is enough. Even a well-known brand needs local marketing and community engagement to drive traffic to a specific location.

• Inadequate Financial Management: Failing to monitor and control costs (especially labor and cost of goods) and not understanding how to read and interpret financial statements like the Profit & Loss (P&L).

C. Misaligned Expectations and Commitment

• Having Unrealistic Expectations: Believing the franchise is a "turnkey" or "passive" investment that will yield immediate high profits without intense personal effort. Franchising still requires dedication, long hours, and active management, especially in the first few years. The work-life balance that might previously have existed in their prior career will very likely need to be put on hold, especially in the earlier years when the franchise is being established and the franchisee is gaining familiarity to effectively operate their own franchise.

• Lack of Personal Fit: Choosing a business solely for its profitability without considering whether it aligns with their personal skills, interests, or tolerance for the daily demands of the operation (e.g., managing people, long hours, etc.). Franchises can be extremely demanding business enterprises, when many people pursuing a franchise business venture following an unrelated career (i.e., an office job or a government job), and are shocked to discover the differences as to what is required of them, as well as the challenges to work-life balance.

• Misunderstanding the Level of Control: Expecting the independence of an owner-operator when a franchisee must adhere strictly to the franchisor's rules, guidelines, and procedures. You are "in business for yourself, but not by yourself."

• Ignoring Franchisor Support: Not fully utilizing the training, resources, and ongoing support provided by the franchisor, often due to a "know-it-all" attitude or a desire for complete autonomy. There is significant value in working with the franchisor, especially where there are challenges to the franchised business, such that you might hopefully avoid those issues becoming far more serious problems that could potentially destroy the viability of one's franchise.

Christopher Neufeld is a business lawyer knowledgeable in the rigors and challenges of the franchise business, together with the legal constructs that are critical to their effective operation. For experienced legal representation in starting, acquiring / selling, operating and managing a franchise, contact franchisee lawyer Christopher Neufeld at 403-400-4092 [Alberta], 905-616-8864 [Ontario] or Chris@NeufeldLegal.com.