The decision to buy a franchise is a big step in your entrepreneurship journey. As a first-time buyer, it is easy to make very costly mistakes that can get you on the wrong side of the law, hurt you financially and wreak havoc to your peace of mind. To help you avoid unpleasant surprises, we have compiled this list of 7 mistakes you should avoid when buying a franchise.
1. Not Understanding the Market
When buying a franchise, you are most likely to follow your passion or whatever is trending. While the industry you are buying into may seem lucrative, this is not always the case. Being blinded by passion or trends will have you investing in a business that may not meet your customers’ needs, or one that will lose its relevance in the next few years. Before buying a franchise, due diligence is crucial in understanding the market you are getting into.
Look at the bigger picture and avoid investing in what’s hot in the market as it may lack relevance in a few years to come. Conduct in-depth research on the market and consumer needs, and figure out how you are going to fulfill them. Also, study your competition and try to predict market changes so that you are well-equipped to handle them. Market research will furnish you with the necessary information needed to make informed decisions and invest in a profitable business.
2. Not Consulting Other Franchise Owners
Franchise buyers always make the mistake of talking to everyone else about their buying decision except the people who really matter—the franchise owners. Though you may get great advice from every other person, franchise owners have first-hand experience in the business. They are, therefore, in a better position to give you the reality of the business.
Consulting other franchise owners before buying a franchise gives you valuable insights about the business you plan to invest in. This includes everything ranging from marketing and market research and the earning potential of your business to customer behaviors, and the dos and don’ts of running a franchise. From their experiences, they know what works and what doesn’t. You can find leads on who to talk to in the Franchise Disclosure Document provided by your franchisor, or you can do your own research.
3. Underestimating Finances
Underestimating your finances can cause your business to fail even before it is stable. This not only applies to the required capital needed to start the business, but also the amount of working capital required sustain it until it reaches its break-even point. An over-ambitious cash flow and profit projection is also one of the costly mistakes that could land any franchise buyer in deep financial problems.
Most businesses start making profits after about 18 months. However, you should understand that every business is unique, and there are other factors that affect profitability such as marketing and how well you implement the franchisors systems. With this in mind, be deliberate about your finances and try to make accurate estimates on both your operating and personal expenses. Ensure you have enough working capital to keep things running until your business is stable and starts making profit. To cushion you from unpleasant financial surprises, it is always recommended to have funds that are double your estimates.
4. Working Without an Attorney
The process of buying a franchise can be a confusing and intimidating one. There are contracts to be signed and lots of paperwork to handle which makes it very easy to make mistakes earlier on. While hiring an attorney may seem expensive and unnecessary if you are confident in yourself, it is highly important in understanding the clauses of your agreement, and protecting you in case of future misunderstandings.
Every franchisee is given a Franchise Disclosure Document (FDD) containing various items covering the different aspects of business by the franchisor. The 23 categories of content may be intimidating, and most franchise buyers tend to skim through them, resulting in misunderstanding about responsibilities. Other legal documents like contracts and lease agreements also require keenness before signing. Going through paperwork with your attorney helps you understand both the contents and your position in the franchisor-franchisee relationship.
5. Wanting to be Independent
Being an entrepreneur, owning your own business may be one of the things that drove you into buying a franchise. Though buying a franchise is a significant stride towards independence in your entrepreneurial journey, it doesn’t mean you are free to run the establishment as you please. Trying to innovate and chart a new path for the business will only result in failure and strained relationships with your franchisor.
Operating a franchise means you have to abide by the franchisors implementation systems and business plan. You may also be restricted on where to source your materials. Trying to modify the franchisors way of doing things most times leads to failures and does nothing for your business. If you are not ready to follow your franchisors directions, you are better off staring your own business from scratch.
6. Assuming that Success is Guaranteed
It is highly dangerous to get into business with unrealistic expectations, and most franchise buyers suffer from this predicament. Just because you are buying into a lucrative industry and working with a successful business doesn’t mean your success is assured. Like every other investment, buying a franchise is a risk that can either pay off or disappoint.
The success of any business depends on various factors ranging from location and marketing strategies to leadership and financial management. You have to put in work, implement the franchisor’s systems to the latter, understand your market and have a great marketing team with you. You must be willing to go all the nine yards and put in effort, otherwise it won’t work out.
7. Lacking an Exit Strategy
With every risk, there is a possibility for success or failure. Most franchise buyers make the mistake of only expecting the best and not preparing for the worst, leading to them not having an exit strategy for when things go wrong. Lacking an exit strategy leaves you in a tight spot and could lead to massive financial losses in case things don’t go as planned.
When buying a franchise, make sure you have an exit strategy in place that will come in handy when you need to discontinue your partnership with the franchisor. Without a tangible plan, you might find yourself stuck in a business that is unprofitable. Worse still if you close shop before the end of the contract, you may end up incurring expenses like rent and franchise fees even when you are out of business.
Buying a franchise means you get the independence that comes with owning your own business while enjoying the perks of associating with a big brand.