6 Common Mistakes to Avoid When Buying a Franchise

A franchise can look great on paper. You already have the branding power, the supplies you need to get started and the training to succeed. However, having these valuable tools doesn’t mean your franchise will be successful.

With thousands of franchises coming in all shapes and sizes, you won’t want to pick out the first one you see because you like what they sell. Instead, you’re going to want to do your due diligence to be convinced you’re getting the best bang for your buck.

Before you even consider buying a franchise, here are six common mistakes people make when buying a franchise:

1. Buying the “Hot” Franchise

You have probably seen the magazine or Internet ads stating the next greatest thing is coming to your city and all you will need is a simple $100,000 investment to capitalize on this “trend.”

While most people follow the herd and purchase big-name franchises, some people often go off the tracks and take the gamble on an up and comer. This can be a problem, however.

For starters, this trendy franchise can be a dud in five years. Secondly, just because it seems like a great opportunity to you, it doesn’t mean it will be to someone else. Be sure to look at the full picture and dig into the long-term potential to see where it may be in the future.

2. Not Talking With Franchise Owners

Sadly, a lot of new franchise owners jump in head first without talking to other franchise owners. “Too many people take the advice of their family and friends without thinking about talking to the most important person of all – the owners,” said East Coast Wings & Grill.

Franchise owners tend to be very open, and if they have something good or bad to say, you will probably hear about it. Nobody is going to know this business model more than someone who is working it today.

3. Skimming the Contracts

Excitement can get the best of us; it’s human nature. However, it can be harmful to your personal life, finances and franchise if you don’t read these contracts closely.

Typically, the disclosure statement will be close to 80 pages, and it’s so important you understand every single item since this discusses everything from your responsibilities to financial numbers.

While this paperwork can tend to be boring, don’t skim it or just assume everything will work to your advantage. It’s best to hire a lawyer to have them go over it with you and discuss any challenges you may face when going forward.

4. Look Into Failures

Regardless of how big this franchise is, there’s a good chance there have been failures in the past. Try to local a franchise which has failed in the past and try to figure out what happened. Usually, you should be able to find the previous owner’s information by either contacting the franchise or looking through business records at your local government office.

When you do find this information, see what the owner had to say. If you’re talking with a lot of failing owners and are hearing the same story, then it may be something to avoid. Like talking to the active owners, you will want to do the same with failing ones as well.

5. Not Having Enough Working Capital

No franchise will be handed to you for nothing, and this is why all franchises will have some sort of capital requirement. Even if you meet the bare minimums to open up your first store, you won’t want to forget about the ongoing expenses as well.

One of the main reasons franchises fail is due to undercapitalization. A lot of new owners underestimate their first year to get to their break-even point, and if you don’t have the funds to cover these losses, your business can go under, taking all the initial costs with it.

6. Poor Skills

Having the big franchise name can help draw new customers in; however, if you don’t hire the right people or have the right managerial skills, things can go downhill fast.

Running a successful franchise depends on the people involved, and if the right managers are not brought in, a poor environment can develop, leading to a lot of unhappy customers. Successful franchise owners will be active, creating an environment where everyone can win.

Every year, more than 200 franchise names hit the market, and sadly, 25 percent can’t make it to their first year anniversary. If you’re interested in a franchise, be sure to research as much as possible to make sure it suits your lifestyle. With franchising, as long as you do your homework, there’s no reason you won’t succeed.