Written By: Gouri Ghosh

The franchise industries like food, retail, education, and services are changing their market very quickly.India has lots of franchise and all brands have many outlets.This situation indicates that India has a growing market for franchise business. If investors want to invest under any franchise sectors they get security in their business.

They will get a trusted brand with a proven model.

But there are still many challenges that need to be understood while buying a franchise business. There are many challenges that a new entrepreneur may face while doing a franchise business, such as a high initial investment, hidden costs, slow returns on investments, and difficulties in selecting a franchise location and brand. In some franchise businesses, investors get a return after 2 or 3 years, so it is a problem for new entrepreneurs to be patient for a long time.

From this blog, you will learn about the challenges of franchise business in India and how investors overcome them. Also, learn about the factors that will help you to make the best decision before investing in any franchise brands in India.

What Challenges Faced Investors in franchise business?

Now we will explain to you about the challenges in franchise business and how to overcome them

High Initial Investment and other costs

The biggest problem with buying a franchise business is the high initial investment. Many investors may assume that the initial investment is only the amount of money required to be paid as a franchise fee. However, after initiating the process of buying a business, they realize that the initial investment may be high. This is one of the common problems associated with a franchise business, especially in the initial stages of business.

Challenge:

When you start a franchise, you need to spend money on many things, not just the franchise fee.

Major Initial Investment:

• Franchise Fee: It is the initial fee paid to the brand or business organization.
• Interior Setup and Design: Most business organizations demand a specific design for the business outlet.
• Equipment and Machinery: Most business organizations need special equipment or machinery to run the business.
• Security Deposit and Rent: It may happen that one may have to pay the rent in advance.
• Licenses and Permits: Most business organizations need licenses and permits from the government.
• Marketing Fee: Some business organizations may demand a marketing fee or royalty fees.

You have to pay some hidden costs. The costs will include training the employees, the initial inventory of goods, and the day-to-day running costs of the business in the first three months, as sales will be low. 

Hidden Cost Example

Note:

This table shows that the actual cost of investing in a franchise is higher than the perceived cost of investing in a franchise by most investors. 

How to solve them:

You can minimize the financial risk if you plan well before investing in any franchise brands.

Here are the simple steps:  

• Prepare the plan(finance): First, calculate the total cost of the investment.
• Request the breakdown of the total cost: Always ask the franchisor to explain the total cost of investing in the franchise. 
• Ensure that you have enough working capital. 
• Consider the option of availing a business loan. 

If the plan of investing in the franchise is well thought out, the financial risk of investing in the franchise will be minimized.

Investment Recovery and ROI Uncertainty

When buying a franchise, you face the uncertainty of return on investment. Most new owners expect to earn some money within a short time after buying a franchise; however, most businesses take time to grow.

Challenge:

When you buy a franchise, your profits are not guaranteed at first. In fact, at the beginning, you are likely to encounter several challenges.

Common ROI challenges:

• You are not sure when you will start making your ROI. Sometimes your franchisor may not explain to you how long it will take before you start making your ROI.
• It takes a long time to break even. Most franchises take 1-3 years to break even.
• Overestimation of profits. The profits that are shown by most franchises may be exaggerated compared to what you are likely to earn.
• You may earn more or less depending on your outlet's location.

Break-even Timeline by Sector

Note:

This table indicates that different franchise businesses may take varying numbers of years to recover your investment.

How to control these problems:

You can also reduce ROI risk with proper planning

The steps are:

• Investigate break-even times: Always ask your franchisor about the break-even times for existing business outlets.
• Communicate with existing franchise owners: Talking to existing franchise owners will give you a clear idea about your profits and difficulties.
• Prepare financial projections: Do not rely on promotional profit projections.
• Maintain working capital: Keep some extra funds to manage your expenses during the initial times.
• Invest in successful franchise business models: Successful business models may help you achieve consistent ROI.

If you are aware of these risks from the beginning, you can overcome one of the biggest challenges faced by franchise owners.

Choosing the Right Franchise Brand

When you find the best franchise as per your requirement, you get more than 500 options in the market. But choosing the suitable one is difficult.

Challenge:

The challenges  are:

• Too many options are available in the market, creating a problem for you in choosing the right franchise.
• The brand may not have a good reputation in the market.
• You may not have done proper research on the franchise, and you may end up buying a franchise.

If you end up buying the wrong franchise, you may end up slowing down your business and impacting your profits.

How to beat the problems:

Steps you can follow:

• Do market research: First, you need to do market research and understand the performance of the brand.
• Research the brand’s reputation: Check the demand for the brand and the popularity of the brand.
• Speak with existing franchise owners: Talk with existing franchise owners and get a better idea of the real picture of the business.

Location Selection and Real Estate Challenges

Location is a very important factor for a franchise’s success. Even if you have a great brand name, your outlet may not succeed if you are not careful while choosing a location.

Challenge:

There are a few challenges that a franchise owner has to face while choosing a location for their outlet.

Common challenges:

• High rent cost: Rent in metro cities is very costly.
• Tough to find the best location: You need some time to find a suitable location for your outlet.
• Low customer traffic: The location may be such that fewer customers come to your outlet.

How to defeat:

You can minimize the challenges by taking some steps

Steps:

• Work franchisor (brand): The franchisor may help you find a suitable location for your outlet.
• Study the demand: Find out if there is a huge population living or working in that area.
• Study your competitors: Find out if there are already a few similar businesses operating from that location.
• Developing areas: You may find a few developing areas that are still affordable.

By choosing a good location, you can overcome one of the biggest challenges that a franchise owner has to face.

Operational Challenges for Entrepreneurs

It is a challenge to run a business every day if you are new to the business of franchising. 

Challenge:

Common operational challenges:

• Managing daily operations: You have to handle daily operations like sales, staff, and customers.
• Understanding Supply Chain: You have to get familiar with ordering products and managing your supplies.

How to stop the problems:

You can handle your operations better if you stick to the system.

Helpful steps are:

• Stick to the system: The system will help you run your business smoothly.
• Attend training programs: Training will give you a clear understanding of operations.
• Use management tools: You can use software to handle your operations.
• Develop a system: The system will make it easy for you to handle daily operations.

Hiring skilled Staff and managing them

Employees are playing a good role in the success of your franchise. Your employees may either contribute to a better customer experience or cause issues.

Challenge:

Franchise owners often encounter issues when it comes to staff.

Some common issues with staff are:

• Employees may quit often, Especially in the service industry.
• Training your staff: Your staff may need to be trained to maintain the brand standard.

How to reduce the challenges:

You may be able to improve your staff performance with the right approach.

Some steps you may take are:

• Recruiting the right staff: Your staff may need to possess the right service skills.
• Training your staff: Training your staff may be necessary.
• Giving incentives: Giving incentives may motivate your staff.

Creating a conducive work environment: A happy staff may result in better performance.

Marketing and Customer Acquisition

It is a very important part of how to get customers for stores. So you have to focus on marketing. Marketing is another essential part of your business.

Challenge:

The challenge most new franchisees face is how to market their outlets.

The challenges that most new franchisees face in the marketing of their outlets include:

• Overdependence on the franchisor’s marketing strategies;
• Lack of knowledge on how to market their outlets;
• Competition from the surrounding businesses;

How to reduce the challenges:

The most important aspect of growing your franchise business is to market it and thus attract more customers.

Steps that one could follow to solve the challenge include:

• Use of both national and local brand marketing strategies;
• Use of digital marketing strategies
• Use of local influencers;
• Developing relationships with the community.

Managing Cash Flow and Profitability

Proper management of your finances is vital in running a franchise. Proper management of funds ensures stability in the business.

Challenge:

When you start a new franchise, you may be under financial pressure.

Some of the financial challenges may include:

• A long period before getting a return on investment. This is because it may take some time before the business becomes profitable.
• High costs of doing business. This may result from high rent, salaries, and other expenses.
• Some months may experience low sales.

How to overthrow

You can increase finance flow by proper planning

Follow these steps:

• Proper management of funds. This is by monitoring your finances every month.
• Proper management of costs. This is achieved by cutting down on costs where possible.
• Customer retention. This is to increase sales.
• Increasing sales. This is by selling other products to the same customers.

Maintain the standard of the brand

It is very important to follow the brand rules and regulations for continued operation with the same brand. These brand rules help you to maintain the quality of the stores.

Challenge:

It may be a challenge for some people to maintain brand standards.

Common challenges:

• Tight operational rules: It may be necessary to follow the brand's operational rules.
• Maintaining consistency: It may be necessary to maintain the same quality of service.

How to solve:

Steps you can follow:

• Proper employee training: Proper employee training may help in maintaining brand service quality.
• Using quality systems: These may help in maintaining brand quality.
• Keeping in touch with the brand: It may be necessary to stay in touch with the brand.

Read more: Franchise Failures in India: Why Investors Lose Money & How to Avoid It

Conclusion

Franchising can be an excellent opportunity to start your business in India. It can give you an opportunity to use an existing brand and business model, while at the same time reducing some of the risks that are involved in starting a new business.

However, it is important that you note that there are some challenges involved in buying a franchise, and these include investment, operations, managing employees, and marketing.

The good news is that all these challenges that are involved in franchise business can be managed.

If you can assess all the franchise business opportunities and learn how you can overcome some of the risks that are involved, then franchising can be an excellent and successful business experience for you.

FAQs

Which Indian franchise industries require a high investment?

The food retail and health 

For the franchising opportunity, how can you obtain a business loan?

A business loan for the franchise opportunity can be obtained from a number of banks and financial organizations. Franchises of well-known companies can obtain loans from numerous institutions.

What drawbacks come with purchasing a franchise?

The lack of flexibility that comes with purchasing a franchise and the requirement to pay royalties to the franchisor business are two drawbacks.

Disclaimer: The brands mentioned in this blog are the recommendations provided by the author. FranchiseBAZAR does not claim to work with these brands / represent them / or are associated with them in any manner. Investors and prospective franchisees are to do their own due diligence before investing in any franchise business at their own risk and discretion. FranchiseBAZAR or its Directors disclaim any liability or risks arising out of any transactions that may take place due to the information provided in this blog.