Risks of a Franchise

January 2019
Considering a franchise? Review the risks first

Franchise opportunities abound. A solid franchise company can offer a proven business model, staff training, advertising expertise and many other benefits for jumpstarting a business. But whether you’re selling fast food or repairing cars, it makes sense to identify and scrutinize potential risks before you sign a contract. Here’s what to look out for:

  1. Unrealistic forecasts. The company may have highlighted only successful franchisees in booming markets in its sales pitch. Average income can be deceptive, explaining little about how individual franchisees have performed. Rosy predictions based on historical data don’t always pan out. Obtain market research for the areas you’ve staked out, and talk to other franchisees to identify a realistic timeframe for breaking even.
  2. Unexpected costs. Advertising, initial inventory, legal costs, training, ongoing royalty fees — these expenses and many others can tank a business early on. Identify every potential outlay and build a reserve to cover costs while waiting for revenues to grow. When it comes to expenses, guess high.
  3. Unusually high turnover. The Federal Trade Commission requires franchise companies to provide potential buyers with a Franchise Disclosure Document (FDD). Among other important details, the FDD provides contact information for current franchisees and others who have opted out of the franchise system. Talk to these folks about their experiences, both positive and negative. If the franchise company has been buying a significant number of properties from unit owners, take note. Storm clouds may be brewing.
  4. Unfulfilled promises. Franchise companies may pledge the moon, but deliver something entirely different. For example, you may expect the company to use your advertising fees to promote your local outlet. Instead, the company may pump those dollars into unrelated national advertising.

Franchise companies can help you build a successful business. But don’t forget to analyze the details before signing up.

 

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