The Definitive Guide to Business with Marcus Lemonis

Marcus Lemonis: Common pitfalls any franchise must avoid to be successful

The franchise model has long been a way for companies to rapidly expand beyond what might be possible if they opened every location on their own.

But rapid expansion can be just as much of a curse as it can be a blessing if a franchisor rushes into an unproven concept without the ability or the gumption to assist unhappy franchisees in hard times, according to serial entrepreneur Marcus Lemonis.

For Jeff Hunt, founder of Texas-based fast casual tea franchise Tea 2 Go, that oversight and other pitfalls dragged his company into insolvency with $1 million in debt, according to the latest episode of CNBC's reality business show "The Profit."

From the show, here are four common pitfalls every company must avoid if it wants to join the ranks of McDonald's, Subway and other successful franchise businesses.

Don't rush to expand an unproven concept

Aside from signing up franchisees for Tea 2 Go, Hunt borrowed $750,000 to open five corporate-owned locations of his own, three of which quickly closed. "Right now were servicing that debt with future franchise sales," Hunt said on the show, adding that the company receives $30,000 upfront from new franchisees.

"He was barely collecting enough to cover the interest on the loan," Lemonis said. "He wasted little time building stores and pitching franchises and many folks bought in, but he had never actually proven the model."

Instead of rushing, focus on perfecting a flagship store before "you're left with a pile of debt and no businesses to show for it," as Lemonis said.

Don't ignore franchisees

As is the case with any business, keeping communication lines open is crucial. In the franchise model it's a great opportunity to hear ideas from local stores. However, Taylor Logan, Tea 2 Go vice president, admitted that he often neglected to make himself available to hear feedback from his franchisees, requesting they not bother him after work hours.

Marcus Lemonis meets with Tea 2 Go founder Jeff Hunt (left) and Tea 2 Go VP Taylor Logan.
CNBC
Marcus Lemonis meets with Tea 2 Go founder Jeff Hunt (left) and Tea 2 Go VP Taylor Logan.

"These people put their hard-earned money into this concept," Lemonis said. "When you start to put yourself in the position as the franchisor and you say to somebody, 'I'd like to take your money and then every month as you do business you're gonna pay me,' I don't give a s--t if he emails you at 4 in the morning."

In order to retain respect from franchisees, "they have to feel like you're invested in their business, not because you want a royalty check, because they're essentially buying and believing in what you're selling."

Don't under-equip franchisees

Though margins at Tea 2 Go were relatively high, customers were only spending about $3 per average trip, partly due to the fact that not enough products were being offered to customers.

"If I had to describe this store in one word it would be 'barren,'" Lemonis said. "There are no accessories for sale, no point of sale and zero food. It's almost like they did the absolute bare minimum and said, 'Yeah, this is good enough.'"

Instead, Lemonis ran with the ideas some of Tea 2 Go's franchisees originally tried on their own: Adding food to the menu, and tea accessories to the product offering.

Marcus Lemonis hears input from Tea 2 Go franchisees.
CNBC
Marcus Lemonis hears input from Tea 2 Go franchisees.

"Going forward after adding food and accessories I am hoping to take that to $10 — more than tripling revenue and improving the customer experience."

Don't try to franchise something you're not passionate about

Despite opening up a tea franchise, Hunt admitted it wasn't necessarily something he was passionate about. "I'm not a tea drinker," he said.

"Why get into a business that you're not excited about?" Lemonis asked. "You just want someone to feel passionate about what they're doing. If you don't have passion for it, it's going to show to the customer," and ultimately any potential franchisees.

CNBC'S "The Profit" airs Tuesdays at 10 p.m. EDT.

Video by CNBC's Andrea Kramar.