10 Costly Mistakes to Avoid When Buying a Franchise

Many people dream of being their own boss someday, but are afraid of the risks involved. We know that it is impossible to take all the risk out of going into business. In many cases franchising provides a way to minimize the risk, but it can never remove all of it.

Franchising methods can be quite complicated, and certainly anyone looking into a franchise quickly learns that there are a large number of factors to be considered.

Again and again, I’ve seen people ignore the important warning signs and make Costly Mistakes when buying a franchise. They fall into the same traps that have victimized others before them. As they say, what we don’t learn from history, we are doomed to repeat!

Costly Mistake #3: Buying into a franchise system with a “weak” business model.

Some franchisors have business models that are doomed for failure. The business model does not deliver enough value to the franchisees, the customers, the vendors or even the franchisor. Business models that do not have a mutually beneficial relationship for all parties will struggle and often fail.

Identifying whether the business model is weak is difficult in a “new to franchising” franchisor. It can also be a challenge is the franchisor is new to the industry. With newer systems, there is a higher risk that the model does not deliver enough value to all parties.

With established franchise systems there are a number of indicators that the business model is returning a sufficient return on investment (ROI). Examine whether there are multi unit franchise operators, and see if they are continuing to expand, also look at what percentages of franchisees renew their agreements. Growth in company owned stores is another indicator of the model delivering a reasonable ROI.

Some things to look for in a franchise system that has only been franchising for a few years are: how many company owned units are they operating, and how long have they operated them? The more company owned units there are, the more likely there is a reasonable ROI.

Being in business is enough of a challenge, having a “weak” business model can be a very costly mistake.

Costly Mistake #4: Buying into a franchise system that doesn’t have a plan.

Some franchisors are more clever than brilliant.

In my experience the brilliant ones have a plan! Make sure the franchise system you want to join has a plan and look for solid evidence that they are working that plan.

Business planning should cover all aspects of management. It starts with setting realistic goals and continues through the methods that can be used to implement and achieve them. Success for any business depends and directly corresponds to diligent planning, as well as the methodical execution of the plan. Planning should be done in such a way that it covers all the facets of business and leaves as little to chance as possible.

Good franchise systems have an effective plan! The best franchise systems train the franchisees to follow the plan to their fullest capabilities.

Costly Mistake #5: Not identifying the types of franchises that will match up with your needs and expectations.

It's important to find a franchise that meets all of your needs in a business. Don’t choose a franchise because it’s the next newest thing, or because there are so many of them. The franchise and the industry/business must be good for you!

Your skills, goals, values, and ambitions will all play a role in determining the best business for you. If you use a little self-analysis, you will have a greater likelihood of successfully finding the right business .to meet your needs.

You must analyze and determine what things are most important to you; Independence Money Freedom Flexibility Growth Challenge Variety People First, consider your personal goals and expectations. You need to not only know the simple things like:

1. How much you want to make 2. What kind of investment you're comfortable with making, But also:

1. What kind of risks you are willing to take 2. How hard you want to work 3. How many hours you are willing or able to work 4. What shifts, and 5. What kind of physical environment do you want to work in, etc?

Each franchise opportunity can fill different types of needs. If you want freedom and flexibility of hours, then food and some other types of retail may be too demanding of your time; perhaps a service business where you can book your own appointments would be better for you. On the other hand, if you want high visibility, then perhaps retail would be better.

Ask yourself: Do I fit with the skills, abilities, corporate personality, etc. of this business?

Make sure to investigate and compare several businesses to see which one best matches your needs and interests. Its important to do sufficient research to not only find out whether a business and an industry is solid, but also whether it is good for your goals, experience, and skills Some people assume that any good business is good for any buyer.

That’s more than likely a costly mistake!

Costly Mistake #6: Not doing enough due diligence.

People often let perceptions guide their decisions, rather than their logic, and in so doing, they set themselves up for the likelihood of making a mistake. Successful people perform due diligence to justify their decision with fact.

Do not sign any contract or make any payment until you have the opportunity to investigate the franchisor's offering. Get substantiation of all earnings statements.

The Federal Trade Commission (FTC) requires all franchisors to disclose important information about the franchise system such as their past earnings, franchise agreement terminations, how many outlets are in operation, etc. This information is contained in a Uniform Franchise Offering Circular (UFOC). The UFOC is a document that is supposed to help you understand what you are buying and the nature of the relationship.

Because investing in a franchise involves a substantial investment, you should have an attorney review the UFOC and franchise agreement, as well as have an accountant review the franchisor's earnings claims, if any claims are made. It will be easier for a franchise specialist to review your contracts than an attorney who must learn franchising on your dollar.

Make sure you understand all of the following:

How the business makes money.

What the Unique Selling Proposition (USP) of the business is.

What is the demand for that particular product or service in your area?

Is the market open for growth, and is the competition you are going to be up against weak, fragmented and vulnerable, or strong? How does it compare to the franchise system you will be joining?

The amount of the total investment required.

How will the business be financed?

Whether you will be required to buy or lease any real estate, and if so, whether they will help you find a location How much time will it take to start or build out the business?

What equipment is required, and whether you buy or lease it. Find out about inventory requirements and suppliers.

What are the advertising/marketing plans?

The length of the initial franchise agreement, how long is the renewal, and whether you have the option to renew it.

What is the break even point considering different variables?

Talk to and meet franchisees:

If your goal is to find a business that you will enjoy and succeed with, then get the real story from the people in the know the franchisees. What do they know? Everything! People who are in a business that you find attractive are the best source of information that you’ll ever find.

It’s important to find the people who are doing well in a franchise as well as to find people who are struggling. Which ones are you most like? Do your skills match the winners?

Costly Mistake #7: Not using experts like franchise attorneys, accountant, advisors, etc.

Lack of experience is often cited as one of the two biggest killers of start up businesses. Certainly your franchisor will help you by sharing their experience with you, but use the experience of other experts, too.

Sometimes people don’t seek expert advice because they don’t want to hear anything that does not agree with their hopes. That’s a costly mistake. If something is really wrong, it’s better to find out before you’re already deeply invested both financially and emotionally. On the other hand, if something is wrong, it may be easy to fix if found early, so the advice you get could definitely be the perfect “ounce of prevention”.

Be sure to consult with financial experts, franchise consultants, and perhaps most importantly, a franchise attorney.

Having an attorney who is knowledgeable about franchising review your offering before you buy could be a lifesaver.

Costly Mistake #8: Picking a franchise someone else likes When you select a business, choose one that suits you. Don’t pick the business your dad (or spouse) likes best, pick the one that makes you feel the most comfortable.

Each person in the world has different skills, needs, and desires. Why would your dad or your neighbor or your spouse like the same businesses that you do?

When you look at a franchise, you need to think about how it matches with the things that you truly want to do and whether it will fulfill your goals.

Also, owning a business is a family decision. Before the search begins, you need to have honest discussions with your spouse about the benefits and challenges of business ownership.

Check out what you would be doing all day every day. Your dream, of course, will be to have other people clean the carpets or make the ice cream sodas, but most young businesses will demand that you work there for at least the first few months to get the cash flow going. Can you take it, or will you find out that the true love that you felt for the product was only a short-lived lust, and soon gone when you had to be there for the day-to-day grind?

I've seen many people buy franchises that might be wonderful for someone else, but not for them, and in so doing; they almost always assure themselves of less success, or even failure.

Don't let it happen to you.

Costly Mistake #9 Not writing a business plan.

An essential part of any franchise business is its plan for success. The word "plan" comes from the Latin planum, meaning to lay a foundation or groundwork. Your business plan lays the foundation for your new franchise.

Formulating a strategic business plan for your franchise is the first step to success.

Remember the famous saying: "Always plan ahead. It wasn’t raining when Noah built the ark." The discipline of developing a franchise business plan lets you look at the challenges ahead and your expectations for your new business. This involves looking at your business ideas and financial needs as well as your marketing and management plans.

One of the advantages in developing a franchise business plan is that a good deal of the information is provided by the franchisor. Much of the financial information is available in the UFOC.

Make sure you consider your strategy for investing, including the entry strategy, a long-term strategy, and an exit strategy. Does the business fit your personal strategy for growth and success?

There are no guarantees that your plans will actually play out. But making the effort to think about and develop a business plan puts you in the driver’s seat. You will have thought through almost all of the potential issues and either revised your plan or outlined contingencies. You will also have a clear idea of the costs and benefits involved, including the costs of not proceeding.

Simply put, many people do not take the time to really understand what they're trying to achieve when they invest in a business, and consequently, they are never satisfied with the results.

When you’re planning, be conservative. If there are going to be surprises, let them be pleasant ones.

If you know in your heart that you can do what it takes to make a business succeed no matter how challenging it is, then you are well on your way towards success.

Costly Mistake #10 Not following the business plan.

The day has finally come where you have completed your dreaming and planning and are ready to take the big plunge. It is time to start your franchise. By the way, if you have made it this far then give yourself a pat on the back. Very few make it to this point.

A word of caution is warranted here. During this phase you will be bombarded with opinions, advice and the like. Although well intended, some of this input will be in conflict and it is up to you to sort it all out and make the right decisions. If you plan on being in business for the long haul then take your time with this phase.

When you adhere to the guidelines established in your business plan, you will be able to monitor your results, makes adjustments if necessary and stay on track to achieve the goals.

Franchising offers many outstanding opportunities.

The growth of franchising is inevitable, because of the inescapable logic of the underlying concept. Franchising clearly offers aspiring, new business owners the best possible chance of succeeding with the least amount of risk.

Within the next 10 years, franchising will comprise over 50% of the retail economy and employ millions of people, and will enable hundreds of thousands to realize the dream of successful business ownership and financial independence.

Franchising is evolving. There will be even greater opportunities for wealth creation among both franchisees and franchisors as this evolution progresses. New franchises will be developed while the existing systems become more fortified and continue to grow. Today, there are greater opportunities for wealth creation among both franchisees and franchisors than ever before.

The future of franchising is as bright as ever and if you are ready to take the step and go into business for yourself, franchising is the vehicle to take you where you want to be in the 21st century.

10 Costly Mistakes to Avoid When Buying a Franchise - To learn more about this author, visit Jim Coen's Website.

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