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Buying a Franchise? Avoid These Pitfalls

[ 0 ] Apr. 24, 2014 | SBO Editor

franchise

Thinking of buying a franchise? Franchising is a wonderful way to be in business for yourself, but not by yourself, as the International Franchise Association likes to say.

Franchising is booming.. The road to fame isn’t always paved with riches, however. While most franchises are legitimate and many offer great potential for success, there are pitfalls to avoid and strategies to follow that can help you along the way.

Investing in a franchise operation takes a lot more than money. It takes time. Time to do research and time to reflect on whether or not the franchise you are considering is the right one for you.

Whenever you’re investing your money you want to make sure you’re investing it wisely. Following are some guidelines on what to look for (and look out for) in your quest for the “perfect franchise.”

Franchise Buying Pitfalls

Remember, you are investing a bundle in this new franchise operation. It’s up to you to do as much homework and research as you can to avoid disaster. Here are five important things to consider to help you avoid any pitfalls.

1. Unbridled growth.
Beware of the franchise that brags about how many new franchises it’s sold within the past year. When franchisors become overextended they aren’t able to offer their franchises the level of support necessary to sustain solid operations. Quality and profitability may suffer.

When franchises become under capitalized, there’s a tendency to sell franchises to anyone who has the necessary funds. Don’t jump into something simply because the “price is right.”

Check on the track records of franchisees that have signed up in the last year or so. How are they doing? What about more established franchisees? Can you determine how long it will be before you make back your investment?

2. Hidden costs.
Understand completely what fees are involved and what products and services you’re expected to purchase from the franchisor. Will you be required to purchase all materials and inventory from the franchisor? Are those costs competitive with what you could obtain “on the open market”?

Carefully examine the royalty structure of the franchise as well. If there’s an ongoing franchise royalty involved, what is the percentage? How will this extra expense affect your bottom line?

Royalty figures in terms of percentage points often sound low such as 5% or 6.5%. They do add up. Take out your calculator and perform some basic math and see where you stand.

It’s also important that you consider how often these payments must be made to your franchisor. Are they made monthly, quarterly or annually?

3. An opportunity that sounds “too good to be true.”
Be cautious about claims promising “easy money,” or “guaranteed profits.” There are no guarantees in business, regardless of how impressive the figures look on paper.

If it sounds too good to be true, it probably is.

When considering a franchise opportunity, do some homework of your own. What competition will you be up against in your sales territory? Does the franchise establish specific territories so you won’t be competing with other franchises under the same name? Is there a demand for the product or service in the area you’ll be located?

Just because a franchise has been successful in one market, doesn’t mean that success will automatically transfer anywhere. Make sure you understand your market.

Remember that the Federal Trade Commission in Washington, D.C. has ruled that it is illegal for a franchisor to make any claims on sales or revenues that you might generate with your new franchise operation. In other words, they can only tell you what other franchisees have made in their locations. They can not predict your results in your market. If they do, they are breaking the law.

4. Franchisors that promise a profit in your first year of operations.
It may take some time to get your business off the ground. Promises of “quick cash” or “easy profits” are empty promises. A franchisor who tells you, up front, that you may not make a profit during your first — or even second — year of operations is providing you with some honest feedback on what to expect.

The best bet is to talk to other franchisees in areas that might be comparable to yours. Did they make a profit?

5. Your own motivations.
If you’re looking for a franchise because you want to “make money,” you may be in it for all of the wrong reasons. Success in franchising, as in any business, requires a strong commitment. You must love the business and have an emotional investment in it as well as a financial one.

For more information, visit www.franchise.org

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Category: Features