If you are about to buy a franchise, below we identify 5 mistakes that you need to avoid. Buying a franchise and establishing your own franchised business is an exciting process with significant potential for your future, but you do need to proceed with caution and you must engage in a due diligence process. Avoid the 5 mistakes below.
This happens often and is not so easily to identify when it is occurring. That is, you speak with a franchisor, meet with their sales team, hear great stories about the industry and for one reason or another or for many reasons mentally, love the brand and become committed to buying the franchise. Because of this mental commitment you either forego the due diligence process or if you go through the due diligence process you view it as a mere formality and overlook the facts that could prove troubling or problematic. That is, you become emotionally committed to the franchise opportunity before you objectively complete your due diligence and legal review.
When discussing the advantages of their franchise opportunity, many times franchisors will promote and rely on overall industry statistics where they discuss how big the industry is and overall industry growth trends. While it is always important to participate in a solid industry, your focus should be on individual unit performance and what will differentiate your franchise from the many competitors in the marketplace. Consider, for example, that the quick service restaurant industry is a multi-billion dollar industry, yet franchise there will be franchise systems and brands that succeed in this market and those that will completely fail. So, select a franchise opportunity based on the specific advantages that the franchisor will bring to the table and not industry statistics. To learn more about why individual unit metrics are so much more important than industry statistics, read our Franchise Success Study at Franchisee University. Also, read our blog post about avoiding industry hype.
Similar to mistake number 2, in mistake number 3 you let your guard down and assume that just because the franchise system is big with many franchisees, that it must be successful. To be certain franchise validation (see mistake number 4, below) is critical but just don’t assume that if a franchisor has 100 or 400 franchisees that it must be a good opportunity for you. Larger franchise systems do reach saturation points and may offer less economic value and smaller territories than some of their smaller competing franchise systems. It may turn out that a larger system is the better system for you but you must reach this conclusion through an objective evaluation process and not by just assuming that bigger is better. Smaller start up franchise systems may present a greater risk, but they may also provide you with a better opportunity. It all depends on the facts and details.
Validation comes through an evaluation of the franchisor’s overall reputation, the reputation of the franchisor’s management team and the experiences of current and former franchisees in the system. The FDD contains detailed disclosures and information about franchisees. It is critical for you to contact existing and former franchisees and evaluate their experiences in the franchise system. Not every franchisee will be satisfied but you need to evaluate the experiences of others and even approach the franchisor about negative comments and information. Failing to validate the franchise is a big mistake.
This mistake happens often and creates consequences that were completely avoidable. Possibly because of mistake number 1 (where you commit too early) or because you mistakenly believe that franchise agreements are not negotiable, you overlook the FDD and fail to engage an experienced lawyer and team to work with in evaluating the FDD and to negotiating your franchise agreement. Just signing a franchise agreement without securing, protecting and modifying your franchise agreement is a big mistake.
Learn more about our FDD and Franchise Agreement Review and Assessment services by clicking here.
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