7 Mistakes When Choosing a Franchise

There are many common mistakes people make when purchasing their first franchise. I’ve seen these before countless times, in fact, I’ve been guilty of many of them myself! It’s so easy to get caught up in the emotion of buying a business, that we often overlook important steps in the process.  Don’t lose sight of the fact that this is a long term relationship that must be mutually beneficial.  You are interviewing them as much as they are interviewing you!

Here are some common pitfalls to avoid when selecting a franchise to get involved with.

1. Don’t go too far outside of your knowledge base.  There will be lots to learn, new experiences, new procedures, new people, new everything! Keep some familiarity and comfort by choosing a business that is familiar to you.  Don’t get sold on hype – go with a business you know something about.  Have you worked in this industry before?  Does it provide a product or service you love and are familiar with?

2. Don’t base the decision on the number of units.  Size doesn’t matter!  There are lots of great concepts with very few units, and lots of really bad ones with hundreds of units.  Be aware of franchisors that put too much of their marketing weight behind the number of units they have or are planning to have.  If they’re growing, that’s great…just don’t let it over-influence you.

3. Don’t base the decision on their ‘ranking’.  Ever notice that it seems like every car you see on TV has won an award?  There are lots of organizations that supply awards! Like size, ranking is a piece of the puzzle, but not the whole picture.  There are lots of associations and organizations that rank franchises.  Understand what the ranking is and what its context is.  Best in category? Fastest Growers? Highest satisfaction? Best gas mileage?

4. Does the business align with your lifestyle?  Make sure that you have a clear understanding of the requirements of the business.  Bars and restaurant can require late hours. Coffee shops require early mornings.  Does the expected schedule line up with your personal life – family, friends, activities?  Too much conflict may lead to unhappiness in pretty short order.

5.Not getting a lawyer to review your documents.  This one happens all the time and it’s crazy!  Contracts and franchisee agreements are often over 50 pages of legal jargon, plus amendments, assignments, leases and on and on.  The cost of a good legal review and advice is nothing compared to finding out down the road you missed an important detail.  I’ve seen lots of franchisees that tell me they didn’t know about sales minimums, non-compete clauses, renovation requirements, territory restrictions, trademark infringement, transfer clauses and many others.  You’re making a deal that’s probably 10 to 25 years or more – a little diligence now is well worth the investment.

6. Not calling existing franchisees.  I always wonder about managers that make a significant hire without checking references…are they so sure they’re right they don’t want to risk hearing bad news?  This situation is no different.  You should be provided a list of franchisees, but not until you’re disclosed.  Start earlier in the process – look them up and call the franchisees.  Ask for a few minutes of their time and tell them why you are calling. Have questions prepared such as whether or not projections are realistic, how is the franchisee/franchisor relationship, etc.  You’ll get amazing answers – probably good and bad.  If you hear a lot of negativity though, that should be a red flag.  Be sure to get clarification on anything that comes up.

7. No exit strategy.  Here’s one I have been guilty of.  You get so excited in the process and your new venture you think it’s going to be all rainbows and puppy dogs forever.  You may never consider what happens when things change – and they always do!  Find out now how you can sell or transfer your business.  Will it even have a resale value? Find out if you can wind it down and walk away.  Will your franchisor buy your business back?  Some of these options will be spelled out in your agreement and others won’t be mentioned. Ask yourself “What is the worst case scenario?” and have a contingency plan for that.

Franchising is an exciting way to fulfill your dreams of being your own boss and a business owner.  Being part of a terrific organization can reduce your risk and instill a sense of pride.  There can also be many pitfalls and challenges you may not consider.  Hopefully I’ve shed some light on a few so you can avoid them.

If you have any questions or comments, please feel free to ask!

Please visit us at businessmattersconsulting.com to learn more.

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