If you are thinking about buying a franchise, you need to be sure to avoid costly mistakes. While buying a franchise can be a good investment, franchises can—and do—fail. Ultimately, it is up to you to decide what you want to do; and, while this can be daunting, there are clear steps you can take to help maximize your chances of success. Here are some tips from national franchise attorney Jeffrey M. Goldstein.
7 Tips for Avoiding a Bad Franchise Investment
Tip #1: Make Sure You Have an Accurate Understanding of the Franchise Relationship
When you are thinking about buying a franchise, it is critical to ensure that you have an accurate understanding of the franchise relationship. While you will be in business with the franchisor and will have the right to use the franchisor’s branding and systems, you will remain solely responsible for your success. Once you sign the franchise agreement, you will only receive limited support, and if your franchise isn’t successful, the franchisor may be more interested in finding a replacement franchisee than helping you succeed.
This is the nature of franchising. While there are plenty of reasons to consider buying a franchise, there are also plenty of limitations and risks to consider. Before you commit to pursuing a franchise opportunity, you should make sure you are prepared for what it means to be a franchisee.
Tip #2: Make Sure You Understand That Success is Not Guaranteed
While buying a franchise can help pave the way to building a successful business, success is not guaranteed. As we mentioned in the introduction, franchises can—and do—fail. In fact, studies put the failure rate somewhere in the range of 20 to 50 percent. Far too often, people assume that buying a franchise is all it takes to build a successful business when this is really just the beginning.
So, what does it take to build a successful franchise? While franchisees can use their franchisor’s branding and systems, it is up to franchisees to do the rest. Hiring, marketing, selling, providing customer service, making business decisions—these are all the franchisee’s responsibility.
Tip #3: Consider Lots of Different Franchise Opportunities
To ensure that you are making an informed buying decision, you should consider lots of different franchise opportunities. Too often, people get interested in a particular concept and pursue it without considering the alternatives. Even if you are interested in a particular industry, you should evaluate several competing franchise opportunities within the industry to ensure that you aren’t overlooking viable options that offer more favorable terms and conditions.
Tip #4: Carefully Review Each FDD and Franchise Agreement
When evaluating franchise opportunities, you need to take the time to carefully review the Franchise Disclosure Document (FDD) and franchise agreement. You will learn a lot from each of these documents, and taking the time to digest them will help you gain a better understanding of what each franchisor does and doesn’t offer. As you review each FDD and franchise agreement, you should highlight the key terms so that they are easier to compare, and you should write down any questions you want to ask your franchise attorney.
To get the most out of each of these documents, you can read our three-part series on understanding the FDD and franchise agreement:
- Understanding Your Franchisor’s FDD – Part 1
- Understanding Your Franchisor’s FDD – Part 2
- Understanding Your Franchisor’s FDD – Part 3
- Understanding Your Franchise Agreement – Part 1
- Understanding Your Franchise Agreement – Part 2
- Understanding Your Franchise Agreement – Part 3
Tip #5: Carefully Consider Your Financing Options
If you are like most first-time franchise buyers, you will be financing your investment. While there are several financing options available here, too, it is important to carefully consider your options and make sure you make the best choice based on your individual circumstances. Just like mortgages and auto loans, business loans come with different interest rates and terms, and taking on a monthly payment that is higher than necessary could make it difficult for you to find success as a franchisee.
Tip #6: Don’t Rush Into It
Buying a franchise is exciting. For most people, it comes with a dramatic shift in their daily routine. They are quitting their job and becoming their own boss, and they are ready to hit the ground running.
But, no matter how excited you might be about buying a franchise, it is important not to rush into it. You need to take your time and do your due diligence, and you need to be sure that the franchise opportunity you choose provides you with a reasonable opportunity for success. If you move forward before you are ready, you could end up paying for it for years to come.
Tip #7: Work with an Experienced Franchise Attorney
One of the best ways to avoid costly mistakes as a prospective franchisee is to work with an experienced franchise attorney. From identifying red flags in the FDD to negotiating your franchise agreement, there are several important ways an experienced franchise attorney will be able to help you. An experienced franchise attorney will also be able to walk you through what you can expect at each stage of the buying process, and will be able to help ensure that you don’t move forward until you are truly ready to do so.
While it is easy to make mistakes when buying a franchise, it is just as easy to make a sound buying decision with the right approach. Once you know what you need to do, you can approach the process systematically, and you can feel confident that you are taking all of the necessary steps to maximize your chances of success.
Schedule a Free Initial Consultation with National Franchise Attorney Jeffrey M. Goldstein
Do you have questions about buying a franchise? If so, we invite you to get in touch. To schedule a free initial consultation with national franchise attorney Jeffrey M. Goldstein, call 202-293-2947 or request an appointment online today.
