Buy a Franchise
What are the risks of buying a franchise? Featuring expert insights, this guide highlights financial and legal pitfalls and shows how due diligence can help protect prospective franchise owners.
What are the risks of buying a franchise? While franchising boasts a proven model, it can also come with financial, legal and operational pitfalls that prospective franchise owners should understand in advance of the investment.
In this guide, featuring expert guidance, you’ll learn the biggest risks and, more importantly, how to minimize them.
Franchise owners tend to enter a system governed by strict franchise agreements, recurring franchise royalty fees and predetermined expectations of performance – unlike independent start-ups. Monetary risk is only the starting point and understanding the structural imbalance early is crucial.
“Obviously, you have the monetary risk – especially with startup franchises,” said Maryland-based franchise attorney Gregory Herman. “There are some who use the franchise model to disguise a business that’s not very profitable, which then lures people in. An important thing to remember is that the franchisor makes money whether you make money or not. There’s asymmetry there.”
Below are five of the most common risks of buying a franchise and how to evaluate them:
Review Item 19 of the Financial Disclosure Document (FDD) carefully (and watch for anything said outside the FDD).
Some franchise agreements require personal guarantees, tying the franchise owner’s personal assets to the business (increasing risk if the franchised business struggles).
Some brands expand aggressively – even when it has the potential to hurt existing owners. “The franchisor might be incentivized to open additional franchises within a tight-knit area for example,” Herman said.
Even when you’ve exited a franchise, you could be limited in your ability to continue working in your chosen field. Some non-competes are enforceable depending on the state.
It’s a common mistake (and it can be a costly one). “People often jump the gun. They’re lured by promises of making a lot of money and want to get things done quickly,” Herman said. “Even with a 14-day waiting period, many don’t use that time to do proper due diligence.”
So, what are the risks of buying a franchise? While they’re real, they’re also manageable. Enlisting qualified legal representation and utilizing strong due diligence can minimize mistakes early, reducing risk and paying dividends down the line.
“Go into the business with your eyes open,” Herman said. “Franchising isn’t a perfect model. Even though it may statistically have a lower chance of failure, it’s still susceptible to the same risks as any business.”
Want to learn more about franchise opportunities on 1851 Franchise? Be sure to visit our Power Rankings to read more on brands making moves.
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