If you are considering buying a franchise, the chances are you are well aware of the need to thoroughly go over the Franchise Disclosure Document (FDD) with a qualified franchise attorney. But, this is not enough, a prospective franchisee must also perform due diligence beyond vetting the FDD.
Many inexperienced or first time franchisees make mistakes that hurt their efforts to running a successful franchise. Here are several of the most common mistakes they make:
1. Having unrealistic expectations. Many prospective franchisees believe that they are making a risk-free investment. This is simply not the case. While investing in the brand you franchise does work to help mitigate risk, buying and operating a business is always a risk.
2. Failing to check up with other franchises. The FDD will contain a list of other franchises and a way to contact them. If you don’t call these franchises and ask questions about operating the business, you may fail to notice consistent problems that could derail your success on down the line.
3. Underestimating the amount of backup capital needed. This is one of the most common mistakes. Time and time again businesses go under because they underestimated the amount of capital needed to get through the slow times.
4. Failing to understand the market. Many prospective franchisees choose a franchise and location they like without ever doing proper market analysis. A savvy businessman would open a franchise that responds to the needs and wants of the local market. Failing to do so can spell certain doom for your franchise.
5. Not having an exit strategy. Never get into a franchise unless you know how you can get out. Otherwise, you can be trapped in an unprofitable business.
6. Trying to take shortcuts. Never ever take a shortcut when investing so much time and money. Always go through a franchise attorney and seek out qualified professional financial advice.
7. Failing to understand how the relationship works between franchiser and franchisee. When buying franchise, you’ll often be subjected to the business decisions of the corporation you bought a franchise from. The decisions they may not always benefit you as a franchisee.
8. Failing to think twice about that hot new franchise opportunity. Sure it’s a great thing to beat the competition to the punch, but sometimes when trying to get in on a franchise too early on you lose out on many of the benefits of franchising. It’s important to evaluate the market and understand the unique circumstances of being the first franchise to enter an area.
9. Not truly understanding the profit potential of the franchise they are purchasing: This is one of the main reasons you need a franchise attorney – to protect yourself from misunderstanding or missing essential information in the FDD. Item 19 should be carefully examined as it provides a realistic estimation of what the franchise’s true profit potential is.
10. Failing to understand or follow the rules of the franchise. Strong and independently minded entrepreneurs may find a franchise limiting and may even come into conflict with the parent company. For such individuals, franchising may simply not be the best option.
Still have questions?
Please call us for a free appointment with Miami business attorney Yoel Molina in our Miami office at 305-548-5020.