The 5 Most Costly Mistakes When Starting a Franchise

Choosing the perfect franchise system is one of the most important decisions many aspiring entrepreneurs will ever make. The difference between the "wrong" and "right" system can be considerable.

So that you can recognise and avoid the most common mistakes, we have put together this guide for you.

1st Mistake: Getting Lost in the Information Jungle

Currently, there are close to 1,000 franchise systems active in the DACH market.

Which concept suits my personality and budget best? Which system offers me the greatest chances of long-term success? Where can I contribute my skills in a meaningful way?

All systems present themselves in a positive, promotional light online, at trade fairs, and in directories. Separating the wheat from the chaff takes considerable time, commitment, and patience. First impressions are often misleading, and prospective franchisees frequently miss out on systems that would have been a great fit and highly lucrative for them. Most founders simply do not have access to all the relevant information about available systems. Insider knowledge is nearly impossible to research independently.

Common Mistakes Made by Prospective Founders

They get lost in the information jungle and give up their search in frustration. Or they don't research thoroughly enough, commit to a system too early, and miss out on the best opportunities.

• What do you need to do to obtain the crucial information?
• You read two to three books on franchising to build a foundational understanding of the subject.
• You are asked to assess your strengths and weaknesses realistically.
• They work through a list of nearly 1,000 franchise systems.
• Depending on your industry interest, you compile an overview of around 200 systems.
• You research and contact franchise systems to narrow down your overview to approximately 20 suitable systems.
• To obtain the key business figures relevant to you, you will need to go through almost the entire application process with the franchisor – this takes approximately three months per system.
• Based on the company figures, you now shortlist three systems in order to prepare a final decision.

What would that cost?

For your comprehensive research, you would need to invest the equivalent of around six monthly salaries in the form of working time and travel costs.

2nd Mistake: The Pre-Selection Is Based on False Assumptions

Which franchise system makes financial sense for me? Which concept will help me achieve my financial goals? To accurately assess the opportunities and risks before purchasing a licence, you need reliable and objective information.

Common Mistakes Made by Prospective Founders

You are working with figures that will not hold up to critical scrutiny. This can mean investing a great deal of time in a concept that ultimately is not viable at all. It is equally difficult, at the outset, to realistically assess the investment required and the initial start-up costs. Yet this is absolutely essential — only by doing so can you ensure that financing the venture is ultimately achievable.

Assessing one's own asset and equity position from a bank's perspective also presents its challenges.

What can you do to make the right pre-selection from the very start?

• You must obtain detailed figures about the system and individual locations from the franchise system.
• You carry out a realistic and comprehensive assessment of your asset and equity situation.
• They research comparative figures and industry benchmarks.
• You engage an external consultant (e.g. a tax adviser) to assess the plausibility of all applicable systems.

What would that cost?

For drafting the initial viability analyses, you would typically need to budget for several weeks of working time. Should you additionally commission an external financial adviser to carry out such an analysis, you would need to factor in costs of several thousand euros.

3rd Mistake: Insufficient Preparation for Applying to the Franchisor

As a prospective franchisee, you apply to a franchise system for one of its licences. Well-established and experienced franchise systems have a multi-stage selection process in place, typically spanning several weeks. The franchise headquarters will carefully assess whether you meet all the professional, personal, and financial requirements expected of future partners. It is not uncommon for only one in every hundred applicants to be accepted into the system.

As a rule of thumb: "The better the system, the more difficult it is to be accepted as a franchisee." Good franchise systems select their franchisees at least as carefully as they select their employees and senior staff.

If you are interested in a franchise licence, you will need to go through an application process similar to someone looking for a new job.

Common Mistakes Made by Prospective Founders

They overestimate their chances of successfully navigating the application process without contacts in the franchise industry and relevant sector knowledge. And they forget that they have only one opportunity per system to make the best possible impression.

What can you do to be accepted by the franchisor?

• They research the right contacts for you.
• You complete a comprehensive application form and submit your application.
• You prepare for your first contact with the franchisor as best you can, entirely on your own.
• You research the key market, system, and competitive information in advance, so you can make a strong impression in the conversation and ask the questions that matter most to you.

What would that cost?

Researching the key information is above all time-consuming. You should allow approximately one week per system.
And what about a successful placement itself? If you were to engage a recruitment consultant with the goal of securing an introduction at your target company, a full application including coaching would cost you between €3,000 and €5,000.

4th Mistake: The Decision Is Made for the Wrong Reasons

A successful business founding depends on three factors aligning optimally with one another:

• The right business idea
• The right founder
• The right moment

The challenge lies in assessing all three factors realistically. Can I genuinely put my skills to profitable use within the desired franchise system? Does the business idea have long-term potential? When will I be able to generate income with the system, and how much? What risks are involved in the planned venture?

Common Mistakes Made by Prospective Founders

They let themselves be guided by emotions rather than facts. At this stage, too, many people do not research thoroughly enough. The result is that capable entrepreneurial types either take the leap into self-employment too soon with the wrong system — or don't take it at all.

What can you do to make the best possible decision?

• You thoroughly review the available information about your preferred systems.
• You develop checklists to establish a basis for decision-making regarding preferred systems.
• They gather and evaluate information until all doubts have been resolved.
• You will be able to make a realistic assessment of your actual entrepreneurial qualities.

What would that cost?

Engaging an external business founding consultancy to work on your behalf for around three days and prepare a professional assessment can cost between €3,000 and €5,000.

5th Mistake: Poor Financing Preparation – Missing Out on Funding Opportunities

Anyone who has reached the stage of preparing their start-up financing has already invested a great deal of time, money, and passion into evaluating their concept. The worst thing that can happen at this point is for the bank to decline the loans you need — rendering all your efforts worthless. In addition, founders in Germany are entitled to a range of grants and allowances.

Common Mistakes Made by Prospective Founders

Many founders submit a suboptimal business plan or fail to prepare adequately for their bank meeting. On top of that, many miss critical deadlines for funding applications.

What can you do to secure your funding?

• You attend start-up seminars.
• You thoroughly research all grants and subsidies available to you and apply for them in good time.
• You create a compelling business plan in which you present yourself, your venture, your location, the chosen franchise system, and the market in a convincing way.
• You prepare a profit and loss statement for four years and a liquidity plan for four years as well (each on a monthly basis).
• You develop a line of argumentation for the bank meeting.

What would that cost?

For comprehensive, time-intensive research into funding opportunities and the preparation of a thorough business plan, you should budget approximately two to four weeks of working time. If this is your first time going through this process, you should also involve a specialist financing adviser in your planning, for which you should budget around €3,000 to €5,000.

How we help you avoid these costly mistakes:

Phase 1: Start

Together with you, we begin by creating a detailed entrepreneur profile. In doing so, we identify your wishes, goals, strengths, weaknesses, qualifications and skills. We also clarify your personal, family and financial situation. We introduce you to the world of franchising and provide you with the knowledge you need around financing your venture.

Phase 2: Matching

Based on your entrepreneur profile, we present you with 3 to 4 franchise concepts that could potentially be the right fit for you. The principle: 3 systems instead of 1,000.

These systems will be presented to you in detail, covering the market environment, strengths and distinguishing features, the profile of successful partners, as well as investment requirements and income opportunities.

We provide you with an initial viability assessment and answer the question of under what conditions the concept is financially viable. We objectively analyse the disadvantages of the system and inform you of the risk category to which it belongs.

We also provide you with a market analysis and system description for many of the systems.

Phase 3: Connecting

We have long-standing relationships with our partner systems and, if you are interested, will personally connect you with the right contact. We will also prepare you thoroughly for your initial meeting — giving you a significant head start over other prospective franchisees.

Should your connecting with the system of your choice have gone well and you wish to continue pursuing the path to self-employment, we will actively support you with the next steps as well, such as securing financing.

With our help, you will reach your goal faster and more effectively.