Buying a franchise is a complex investment. If you are like most prospective franchisees, you are preparing to invest a substantial portion of your life savings (and perhaps take out a small business loan), and you will rely on your franchise’s revenue to cover your business and personal expenses on a month-to-month basis.
With these considerations in mind, when buying a franchise, there are some key mistakes you need to avoid. Here is a non-exhaustive list of what not to do if you are thinking about signing a franchise agreement:
Mistake #1: Relying Solely on the Franchisor for Information
When deciding whether to move forward with a franchise purchase, you need to make your decision based upon as much information as possible. While the franchisor’s marketing collateral and Franchise Disclosure Document (FDD) are fine places to start, you need to dig much, much deeper. A comprehensive due diligence analysis will involve talking to current and former franchisees, reviewing previous versions of the FDD, comparing competing franchise opportunities, and much more.
Mistake #2: Skimming the Franchise Disclosure Document (FDD)
When you receive a copy of the franchisor’s FDD, you need to read it. All of it. Even if there are sections you do not understand, reading the FDD carefully and taking notes will allow you to ask the questions necessary in order to make an informed decision.
Mistake #3: Not Negotiating the Franchise Agreement
No matter what anyone tells you, franchise agreements are negotiable. This is a good thing, because the agreement you received is almost certainly heavily one-sided in favor of the franchisor. When someone from within the franchisor’s organization tells you that their franchise agreement is non-negotiable, this is usually a sales tactic designed to get you to sign before you have a chance to appreciate the risks involved.
Mistake #4: Becoming Emotionally Committed to a Particular Opportunity
Many prospective franchisees fall in love with a particular franchise. Maybe they grew up seeing the brand in their hometown, maybe they bought the franchisor’s sales pitch, or maybe they have invested enough time and energy in evaluating the opportunity that it would feel like too much of a loss to let it go. Whatever the case may be, making a substantial long-term investment based on emotion is a mistake.
Mistake #5: Assuming the Franchisor is Committed to Your Success
As a franchisee, you are responsible for your own success. While it is true that franchisors have a certain amount of vested interest in seeing their franchisees succeed, it is also true that underperforming franchisees get pushed out on a routine basis. As a result, if you buy a franchise, you need to be prepared to be on your own from day one.
Questions? Discuss Your Franchise Opportunity for Free
If you are thinking about buying a franchise and would like more information about the legal risks involved, you can contact the Goldstein Law Firm for a free and confidential consultation. To learn about the firm’s flat-fee service offerings for prospective franchisees, please call (202) 293-3947 or submit your contact information online today.
