If you are thinking about buying a franchise, how can you make sure you don’t regret your franchise purchase? This is a critical question that far too many prospective franchisees fail to take seriously. Buying a franchise requires a substantial investment that you can lose if your business isn’t successful, and even after you lose your investment, you can still find yourself facing claims from your former franchisor for lost future royalties. So, how can you ensure that you are making a sound decision? National franchise lawyer Jeffrey M. Goldstein explains.
The Three Most Common Regrets Among New Franchisees
A recent article on Franchise Direct discusses “three of the top regrets of franchise owners.” While the article doesn’t include any statistics, we’ll assume that it is based on at least some data, and, in our experience, these are certainly among the most common regrets we see.
According to Franchise Direct, the three most common regrets among new franchisees are:
- “Not doing due diligence about franchise systems;”
- “Not researching the financial investment[] required;” and,
- “Not understanding the time it takes to become profitable.”
All three of these are mistakes that routinely lead to failed franchise investments. If you don’t do your due diligence, you won’t be able to establish reasonable expectations—and you will almost certainly be in for some very unhappy surprises. If you don’t research the financial investment required, you won’t know if you have the resources you need to build a profitable business. Likewise, if you don’t understand how long it will likely take for your franchise to become profitable, you might not plan far enough ahead—and this might leave you without a way to sustain your business during its initial stages.
While these are some of the most common regrets among new franchisees, these are by no means the only regrets you will want to avoid if you are considering a franchise opportunity. From overlooking desirable opportunities to accepting an undesirable location or territory, there are many other regrets you will want to avoid as well.
How to Avoid Regrets When Buying a Franchise
So, what can you do to avoid regrets when buying a franchise? As the above discussion illustrates, informed decision-making is key. If you know what to expect—and if you plan for what you can expect—you are far more likely to find success as a franchisee.
With this in mind, here are some key steps to take when you are evaluating franchise opportunities:
1. Do Your Due Diligence
The best way to make sure you don’t regret not doing your due diligence is by doing your due diligence. This is a critical step in the franchise buying process for both first-time and experienced franchisees. There are several steps in the due diligence process, including:
- Talking to the franchisor’s representatives
- Talking to current and former franchisees
- Attending a “discovery day” at the franchisor’s headquarters
- Reading online articles, reviews and complaints
- Reviewing financial statements, lawsuits and other publicly available records
While much of the due diligence process involves talking to other people, it is important to ensure that you are ultimately forming your own opinions and making your own buying decisions. When you’ve gathered enough information, you will feel confident deciding whether a particular franchise is a viable opportunity for you.
2. Consider Multiple Franchise Opportunities
As a prospective franchisee, it is important to consider multiple franchise opportunities. Too often, people get enticed by a particular brand or concept, and then they focus on investing in that brand or concept without looking at alternatives. This “blinders on” approach inevitably leads to uninformed decision-making, as comparing competing franchise opportunities is one of the best (and only) ways to determine if a particular opportunity provides reasonable value and a reasonable chance of success.
Yes, this means performing due diligence on multiple franchises; and, yes, this means spending more time and effort before you can focus on opening for business. But, if it saves you from excessive initial franchise fees, royalty fees and operational restrictions, it will be well worth it in the end.
3. Consider Multiple Options for Financing Your Franchise
Just as you should consider multiple franchise opportunities, you should also consider multiple options for financing your franchise. While many people choose to pull from their retirement savings, this is also a choice that many people end up regretting. Sure, using your retirement savings might make sense, but you might also have other (and better) alternatives available. For example, many first-time franchise buyers will qualify for government-backed loans from the U.S. Small Business Administration (SBA).
4. Read the FDD and Franchise Agreement
Once you’ve narrowed down your options, it is time to sit down and review the Franchise Disclosure Document (FDD) and franchise agreement for each opportunity that you are seriously considering. While you can—and should—have these reviewed by a franchise lawyer, you should also carefully review them yourself. In particular, to avoid the common regrets discussed above, you should focus on finding information including:
- Initial franchise fee
- Estimated initial investment (including reserves)
- Royalty fee
- Advertising fund contribution
- Financial Performance Representations (FPRs)
This list is by no means exclusive. When buying a franchise, the more information you have, the better. If you don’t go into your franchise opportunity with your eyes wide open, you will significantly increase your risk of failure.
5. Seek Professional Advice
From hiring a franchise lawyer to help you review the FDD and franchise agreement to hiring an accountant to help you prepare a pro forma, there are several benefits to seeking professional advice during the franchise buying process. Once you sign a franchise agreement, you’re in it for the long haul—and backing out or requesting a “do over” isn’t an option.
Request a Free Initial Consultation with National Franchise Lawyer Jeffrey M. Goldstein
Are you thinking about buying a franchise? If so, national franchise lawyer Jeffrey M. Goldstein can help you avoid regrets and make an informed buying decision. To get started with a free initial consultation, call 202-293-3947 or request an appointment online today.
