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“I know other franchisees have failed, but that doesn’t mean I will.”

You know, you’re right. You can still succeed in a franchise even if the business has a high failure rate. But don’t make the assumption that because you’re smart, you’re going to make it. Why? Because this assumption can cause you to gloss over the hard-hitting questions you should be asking about a small business franchise opportunity, such as:

1. Is this small business franchise viable in my community?
2. Do I have enough capital?
3. Does the cost structure make sense?
4. When will I be breakeven?
5. Who will my customers be?
6. How will I let my customers know that I’m here and in business?
7. Will I be providing a product or service that people need?
8. Will my target customers need the product or service enough to pay for it?
9. Does the employee pool in my community provide workers with the skills I need?
10. Who’s my competition? How will I differentiate myself?

In reality, you probably are smarter and more experienced than the franchisees who came before you. By reading this article, for example, you’re demonstrating your desire to make a solid and well-informed decision. That’s a huge first step towards your success — but you still have a long way to go. No matter how smart you are, you still need to know the ins and outs of the business model. You need to know its strengths and its weaknesses. You need to know the potential pitfalls. You need to know where you will win and where you will lose. If there are flaws in the business model, you need to define them and, if possible, limit their impact on you. And all of this evaluation and analysis has to happen before you make the decision to buy the small business franchise. Because once you buy it, there’s really no turning back.

Forget about IQ

There’s a flip side to this coin too. Just as you shouldn’t assume your brains and experience will create your success, you also shouldn’t assume that other franchisees failed because they weren’t capable of running a business. Don’t get me wrong. Franchisors do sell small business franchises to individuals who aren’t well suited for the role of entrepreneur. But again, when you decide that franchisee incompetence created the failure, you may not see other factors that likely contributed. An inexperienced franchisee can fail with a good business model or a flawed business model — but you don’t know which one you’re dealing with if you chalk all the failures up to “human error.”

If there have been a lot of failures in the franchisee system, you might hear this explanation from your franchisor: “Well, we’ve been doing a better job of qualifying our franchisees…” Don’t accept that explanation! Here’s what you really want to know:

1. If the failures resulted from lower-than-expected sales or higher-than-expected costs
2. If the sales were too low, was the problem related to the average transaction size or the number of transactions
3. If it’s a retail business, was there insufficient customer traffic? Or did the stores drive traffic, but not sales?
4. If costs were the problem, was the cost of product too high? Or did the franchisees spend too much on non-product-related expenses?
5. Were there other issues, like legal problems, industry trends or aggressive competition?

If you don’t know the answers to these questions, it’s tough to make an informed decision about buying into a failure-ridden franchise system. You may be smart and you may be savvy. But that doesn’t mean you want to take on the challenge of running a business that’s flawed. There are easier ways to make money.

This is the last episode of our franchising series. In summary, remember these five tips when evaluating a small business franchise opportunity:

1. Don’t assume the system is proven.
2. Don’t assume the Franchise Disclosure Document isn’t misleading.
3. Don’t assume the Franchisor is motivated to see franchisees succeed.
4. Don’t assume you can be trained to do anything.
5. Don’t assume that you’re smarter than all the other franchisees who failed.

Questions? Send them to us at questions@businessmorgue.com. We’ll address them in the next episode and publish your information on the site.