7 Mistakes to avoid when you buy a franchise

Investing in any business opportunity, franchising or stand alone, is a daunting experience.

7 Mistakes to avoid when you buy a franchise



Investing in any business opportunity, franchising or stand alone, is a daunting experience.  However, when considering purchasing a franchise business, you should avoid making unnecessary mistakes and learn from others who have gone down the same path before.

I have acted for many franchisees over the years and the following seem to be common mistakes made by potential franchise business owners:

1. Not doing enough due diligence

Due diligence is an assessment process of the potential business opportunity. It is a way to verify the financial and other records of the business, its financial viability and to discover all operational, financial or other current and potential problems. The importance of conducting thorough due diligence with the help of your financial and legal advisers is often not given the attention it deserves.

2. Underestimating the financial commitment

One of the biggest mistakes a franchise business buyer can make is underestimating how much money they will be investing over the period of their franchise agreement. This is where advice from a reputable accountant is vital.  Keep in mind that whatever figure you think will represent your total financial commitment, you should add a minimum of 10 percent to it. You must never buy a business that you cannot afford, as it is a sure recipe for failure.

3. Not speaking with other franchisees

Speaking with others that have been operating within the franchise system you are considering joining is crucial. Current and past franchisees will be your best source of information about the franchisor, their operational requirements and general issues arising on daily basis.

4. Picking a business that does not align with your needs

If you are used to working 9am to 5pm Monday to Friday and having weekends off, then buying a retail franchise store, which must be open for business seven days a week, initially only staffed with family members, yourself included, may not align with your lifestyle and your family’s expectations of your availability.

Discuss any purchase not just with your spouse but also with your children and any other family members expected to be involved in the business.

5. Not following the system

One of the benefits of buying a franchised business as opposed to a stand-alone operation is becoming part of an established brand and process of operations. Not following that process defeats the purpose of buying a franchise. If you are not someone who can follow the directions of others, and are unable to adhere to a system, then you may wish to reconsider your business options.

6. Not having an exit strategy

Any person thinking of purchasing a business, regardless of whether it is franchised, must consider and put in place an exit strategy, a plan which deals with what happens in the future and the options of getting out of such business. It may be done by a way of selling the business, closing it or passing it on to a family member.

Most franchise agreements deal with future sale of the business, as well as death, incapacity and general termination of the franchise agreement.  Any exit strategy needs to incorporate the requirements of the franchisor.

7. Not getting a lawyer to review your documents

A franchise agreement is a contract which will bind you for the duration specified. It may also restrict what you are able to do after terminating the agreement through a restraint clause. So before you sign on the dotted line, do yourself a favour and get the documents reviewed by a franchise lawyer, who can offer advice and guide you in your purchase.

The main point to take is to learn from the errors made by others in buying franchise businesses, and to try and not make your own mistakes.

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