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Four Mistakes to Avoid When Purchasing a Franchise

There are many reasons why you may be interested in purchasing a franchise. Perhaps you’re tired of the monotony of your desk job. You may be looking to start a business venture with a loved one or friend. Or you could just be looking for to break into a different industry altogether. Whatever your motive is, I cannot implore you enough to do your homework before you sign on the dotted line. Many people get caught up in the emotion of buying a franchise where you have made a big life decision and you are looking forward to a bright future of prosperity and gains. This is no light venture though; you want to be sure you’ve covered all the bases before you dive in, otherwise you could fall victim to one of these costly mistakes that franchise buyers often make that I have mapped out below:

1. Incomplete Inspection of the Franchise System: Perhaps the single-most important step to buying a franchise is familiarizing yourself with the system. Unfortunately, most franchise buyers do not take enough time to look into the history of a franchise before buying. To just skim the franchise documents and talk to the corporate owners is the equivalent of buying a house without doing a home inspection. While this franchise system may look great on paper, it is vital to dig a little deeper to determine if this is the system for you. One way you can do this is by visiting other franchisee owner-operators. This is especially easy to do if there are already-existing franchised locations in and around the geographic location in which your franchise will be located. However, if there are none, it is still worth connecting with franchise owners in other geographic locations. Be sure to ask if there are any franchised locations that failed and try to deduce why. If there are franchise owners looking to sell their business, call them up and ask why they are exiting the system. Chances are, if they have had a negative experience with the system, they will want to warn others who might be subjected to the same situation.

2. Poor Understanding of Business Model: I am amazed at the number of franchise owners that lack an understanding of the business model that serves as a foundation for their business. Even if you have an expert understanding of the service provided within the business, it is not the same as understanding the business model. To develop a complete understanding of your business model, you must familiarize yourself with cost structure, expenses, revenues, profits, inventory, staffing, and overhead. You must have a basic understanding of how to read and interpret Balance Sheets and Profit and Loss statements. Understanding these key financial metrics is essential to understanding your business model and will dramatically improve your likelihood of success.

3. Lack of Professional Assistance: Reading about a franchise opportunity on the internet, speaking with the franchisor, and attending a Discovery Day is NOT the professional assistance I am speaking of. Buying a franchise business the right way requires that you seek accounting, insurance, banking, and legal assistance. Especially when it comes to deciphering the Franchise Disclosure Documents. Signing an FDD means a high level of commitment that should not be taken lightly. You want to understand what you are agreeing to before you’re on the hook. Though seeking professional aid throughout this process may add to the cost of the purchase, it is well worth it if the counsel you seek is well-versed in franchise and small business matters. And, please, stop going to your cousin’s uncle’s brother-in-law that is a family law attorney for franchise and small business advice. You wouldn’t go to a pediatrician for knee surgery, so why would you go to an attorney that does not practice in the area in which you need expertise? Don’t be pennywise and dollar foolish. In the end, you will end up spending more on each or going bankrupt.

4. Underbudgeting: This is a huge problem for franchise buyers. From an expense perspective, think of buying a franchise like going on vacation; while you can do you best to plot out the fixed expenditures, it always ends up costing more than you think. There will always be something small that you didn’t think of ahead of time. Then over time, these small fees and purchases slowly add up to a much larger, unbudgeted amount that puts you in a bind. If you do not have sufficient cash on hand, the ability to raise capital through friends or family, or a line of credit or other loan source sufficient to get your business through downturns, you will fail. Make sure you speak with a trusted advisor experienced in small business money matters so you can start off properly. The honeymoon period ends quickly, make sure you are ready for the financial realities of the small business world.

While this is a lot to take in, it is better to be over-prepared than under-prepared. Nobody ever regretted doing their due diligence before making a huge life decision. Why put yourself at a disadvantage before even getting started? Taking precautions such as those mapped out above can help guide you to the path of longevity and success that you’ve been dreaming of with your business franchise.