Becoming a business owner is nothing to take lightly, and this is especially true when buying into a franchise. What to be aware of, ahead.
Becoming a business owner is nothing to take lightly.
Whether you’re launching your own venture or buying into an existing one, you have to understand the full extent of your commitment before taking on such a heavy responsibility. This is especially true when you consider buying into a franchise and becoming a franchisee.
While most people look at buying a franchise as a business decision (which it is), many fail to recognize the impact it will have on their personal lives. After all, when you take the financial issues out of the equation, you’re left with your time.
Are you willing and prepared to dedicate the time it takes to successfully operating and managing a franchise? Unless you consider all the pertinent facts and details, you won’t know until it’s too late. Here's what you need to know before signing
Related Article: Real Talk: Is Franchising As Profitable As You Think?
Don’t Rely On Spreadsheets and Empty Claims
All too often, well-intended prospective franchisees fall short of their goals because they depend too heavily on a franchisor’s analytical spreadsheets and empty claims.
In other words, they don’t verify promises or dig deeper into what various numbers truly represent.
First off, it’s important for prospective franchisees to read the fine print and identify things like hidden fees and non-compete provisions. While you should be able to easily locate the percentage of revenue you’re required to give back to the franchise, other costs related to things like marketing, advertising, training and legal matters aren’t always so visible. Carefully review all documents to verify which fees you’re expected to pay and which expenses the franchise takes on.
As for non-compete provisions, many franchises will include these in their franchise agreements to prohibit franchisees from leaving and starting a similar business in certain areas. If you’re unclear of whether or not there is a non-compete provision, you should ask. Even if there’s nothing stopping you from leaving and starting your own company, there may be strict rules against contacting current clients or bringing certain knowledge and resources with you.
Pitfalls and Mistakes Franchisees Commonly Make
Now let’s take a look at some of the common pitfalls and mistakes first-time franchisees make during the buying process. By avoiding these, you can enhance your chances of making a smart decision that makes sense both financially and personally.
Not Teaming Up With a Lawyer
Buying into a franchise is a massive undertaking. As such, it needs to be carefully dealt with from a legal perspective. Unfortunately, many prospective franchisees try to maneuver this part of the process on their own. They’ll either gloss over the legal jargon altogether or only take a cursory look and move on.
This is a grave mistake—and one that will eventually come back to hurt you. Always retain the services of an attorney when reviewing legal documents. If possible, find a lawyer that’s experienced in franchising.
Not Contacting Current Franchisees
The best resource a prospective franchisee has is current franchisees. They’ve been through everything you’re getting ready to deal with and can explain the pros and cons of the company. While the franchisor will likely take you on a tour of two or three different franchises, it’s important to do your own independent research. Go back and ask questions that you may not have wanted to ask in front of the franchisor.
Furthermore, find a couple of locations that you weren’t taken to and drop in. See what their experiences have been like and whether they can verify the verbal claims you’re hearing elsewhere.
Not Having Enough Working Capital
Many people assume that because they have enough capital to purchase a franchise they’re “good to go.” However, remember that it’s very rare for a business to thrive without a regular influx of new capital.
Franchisees that are unprepared for operating costs are in for a rude awakening. Specifically, you need to make sure you have enough capital to survive the launch and reach the break-even point where the franchise finally becomes profitable. At this point, you can start reallocating profits back into the business.
Not Talking to Failed Franchises
Even the best franchises have locations that have failed in the past. Sometimes this is the fault of the franchisee, while other times it falls on the shoulders of the actual franchise structure. Unfortunately, most new franchisees don’t take the time to find out which is the case. You need to do your due diligence and make careful notes of why each location failed. If you identify a common thread—such as very little support from the franchisor—you should investigate the issue and bring up your concerns with the franchisor.
Related Article: Don't Mind the Hype: Avoid Getting Burned by a “Hot” Franchise
The Reasons to Buy Into a Franchise
After reviewing the above four potential pitfalls and mistakes, it may seem like a bad idea to invest in a franchise. Don’t be overwhelmed, though. If you can avoid these blunders and identify an opportunity that’s right for you and your family, you may be making one of the business decisions of your life. Here are some of the top reasons for investing in a franchise:
It’s a Proven Formula
The beauty of the franchise model is that you’re buying into a proven idea. The hard part has already been done for you, now all you have to do is piggy-back off that, follow the formula, and reap the benefits. While that’s an extremely simplified view of franchising, that’s what it comes down to.
If you can identify a franchise model that works and do exactly what they say (while hopefully infusing a little creativity and innovation to complement the core structure), you’ll do just fine.
Better Access to Funding
Depending on your financial situation, you may have a better chance of attaining financing as part of a franchise than you would on your own. While the franchise may only give you access to a certain amount of capital, they may have solid relationships with third-party lenders. This enhances your chances of getting the funding you need to move your business forward.
Assuming you’ve done your research and identified a good franchising opportunity, you’ll have access to an excellent built-in support system. From the franchisor to the other franchisees in your area, you’ll have people to bounce your ideas off of and work through problems with. That’s something you don’t get when you’re starting your own independent business.
Putting it All Together
It’s difficult to make assumptions regarding franchises, as each one comes with its own individual circumstances and variables. However, by knowing which pitfalls to avoid and which elements to look for, you can make an educated decision regarding whether the purchase of a franchise is right for you.
Ultimately, it’s important to remember that the positives and negatives of buying into a franchise don’t fit neatly into a spreadsheet. Every situation is unique and you must identify whether you’re willing to give the franchise the attention it needs to thrive.