Starting your own business from scratch is never easy. There are a lot of things to consider, from the operational, technological, and regulatory challenges. That is why it is easy for many budding entrepreneurs to feel discouraged when creating a new business idea that will dominate today’s market. To prevent these hurdles, many turn to business franchises as the easiest route to become a business owner.
Most people believe that running a franchise is the simplest way to open your own business. After all, it comes with a proven business model that offers many advantages without having to start a brand-new business plan. This is a significant endeavor for eager entrepreneurs who want to try it as an investment and enter a specific industry. It also comes in different business formats, from the hydraulic hose repair business, fast-food chain, convenience store, to the parcel service.
In reality, purchasing a franchise is never simple, nor is it a free ticket to a successful business. It also comes with real challenges that involve risks, which can seriously harm your finances. Most entrepreneurs immediately jump the boat without engaging in a due diligence process. That being said, here are the top mistakes when buying a franchise and the ways to avoid them.
Mistake #1: Skipping research
No matter how determined and hardworking you are to run a franchise, skipping research will bring serious consequences. Most entrepreneurs often go for “trendy” franchise opportunities, thinking it will bring them the most profits only to find out that it is a meaningless venture. This often happens to those who make immediate buying decisions while falling into the trap of sneaky franchisers who label themselves as “popular” and “profitable”.
The franchise you’re planning to purchase may be popular across the country, but that doesn’t mean it will also do well in your location. Conducting market research and evaluating your financial capabilities will determine if you should invest in a certain franchise. Relying your decision on facts will prevent regretful actions in the future.
Buying a franchise is an expensive investment, so it only makes sense to do proper research to understand the expenses and risks involved before making a quick dive. These expenses include franchise fees, rent, royalty payments, and inventory. Knowing these things will give an educated estimate of total expenses and avoid any surprises after making the purchase.
Before deciding on whether to purchase a franchise, confirm the franchiser’s claims when it comes to potential earnings. A franchiser who constantly pressures you to make the purchase is often the one who doesn’t have the best intentions.
Mistake #2: Failing to understand the franchise agreement and disclosure document
The law obliges franchisers to present the FDD (Franchise Disclose Document) to their potential buyers. While these documents are very lengthy that can go over 80 pages, they are the most critical source of information to understand the ins and outs of the franchise.
Most franchise buyers tend to overlook and misunderstand the responsibility discussed in the FDD. This often leads to bigger problems if you fail to address them to the franchiser. This also applies when franchisees sign a franchise agreement without fully understanding the terms and conditions.
The FDD comprises different sections or items that discuss various parts of the business. While reading the FDD, highlight the items you find unclear or confusing. Once you have the list, discuss each of them with the franchiser and ask them to explain each of the items. You can also request them to go over the FDD so you can raise questions during the discussion. This approach will provide clarifications about the sensitive points of the franchise.
For the franchise agreement, it is best to seek legal advice to have an in-depth explanation about specific clauses in the contract that you find difficult to understand.
Mistake #3: Not talking to previous and current franchisees
Your market research is never complete without reaching out to previous and existing franchisees. The FDD should contain a section that includes contact information for past and current franchisees. Use it to your advantage by asking them about their personal experiences when handling the franchise. This will give you a better insight into the specific challenges they encounter when running the business.
You can also ask questions and raise concerns about the credibility of the franchiser. You may also ask them to verify the accuracy of information and claims provided in the FDD. They can also provide support and advice about the franchise.
While there is no clear formula towards success, preventing the mistakes above will certainly increase your chances of starting a successful franchise business. All it takes is a serious commitment by doing your own research and finding the best source of information.