Franchise businesses are a wonderful way for professionals to build thriving small businesses, but there are some icebergs out there potential franchise owners need to avoid.
Here are four:
Failure to absorb the FDD
It’s baffling to think that a franchisee would invest thousands of dollars in a business venture without knowing what he or she was getting into — especially when the law requires franchisors to disclose detailed information about operations, costs, earning potential and legal requirements.
But it happens. People get so excited about their business venture that they don’t read the Franchise Disclosure Document, or just read the Item 7 expenditures and Item 19 earnings information and skip over the rest. Then they’re caught by surprise later when it’s too late.
If you’re thinking about buying a franchise, you should review the FDD thoroughly and carefully, preferably with a good franchise attorney who can help you pinpoint problem areas or language that needs clarifying.
Underestimating what you need
It’s an easy trap to fall into — underestimating how much working capital you’ll need to make the business work. Small business loans are hard to come by these days. Unless you’re fully capitalized already, you’ll be cobbling the financing together from assorted sources, and it’s tempting to think you can scrape by on a minimum investment.
It’s a very risky way to go. If you hit a rough patch, you’ll need cash reserves to tide you over until you recover, and if the business account is empty, you run the risk of going under.
Failing to do due diligence
Before you even sign the franchise agreement, you need to go through the validation process, talking to franchise owners about the ground-level benefits and challenges of running the business.
Do not assume talking to three top-performing franchisees is enough. You have to talk to the average franchisees, longtime franchisees, new franchisees, those doing well, those doing not so well. You should find out specifically why former franchisees left the system, whether it was a systematic problem or a matter of the kinds of errors detailed here.
Going your own way
There’s a paradox at the heart of franchising. The industry tends to attract aggressive, smart self-starters, take-charge types who never saw a business proposition they couldn’t improve.
These people can make horrible franchisees.
When you buy a franchise, you’re not buying a job, and you’re not bringing something to life from nothing. You buy an established name and system in a business you own, and the price for the advantage is the investment, franchise fee and royalties. That’s the deal.
But time after time, some franchise owners’ go-it-alone instincts get the better of them. Three or six or 12 months in, they get restless. This marketing plan is stupid. I can do it better. My customers want a different message. The franchising graveyard is filled with businesses that failed because the franchise owner didn’t follow the system, presumably the reason why he approached the franchisor in the first place.
FranNet is the nation’s most well-respected leader for matching individuals with franchise opportunities. FranNet has more 90 consultants across the U.S. who use a proprietary profiling and consultative process to determine a business model unique to each client’s goals, skill sets and interests, and has matched thousands of entrepreneurs to rewarding small business opportunities. Recognized by Inc. Magazine as one of the fastest growing private companies in America for the last three years, this year marks FranNet’s 25th anniversary. For more information, visit www.frannet.com.