Buying a franchise is the best option for people who want to go into business without the hassle of having to come up with a product and developing a brand. Franchising has been available for a few decades but it has been attracting a lot of interest recently. This doesn’t mean that all franchises are the same or franchising always leads to high profits. While franchising has opened a new realm of opportunities for budding entrepreneurs, this process is often trickier than it might seem at a first glance. The first and maybe the most important step in buying a franchise to pick one of the most profitable franchises. Quiznos was one of the hottest sandwich chains a decade ago. However, the company went into trouble in recent years. Four years ago 6900 franchisees sued the company and settled for $95 million because Quiznos overcharged them for supplies and failed to provide adequate marketing support. The company was again hit with lawsuits last December. The claims were similar – the company put its profits ahead of its franchisees who are struggling to break even.
Quiznos isn’t the only franchise that had disgruntled franchisees. Burger King was sued in 2009 by the National Franchisee Association (NFA) because the company set the price of its double cheeseburger at $1 which understandably hurt the profits. Low priced items lose money but they attract traffic to the restaurants. The parent company has incentives to drive traffic to the restaurants even though the promotions are losing money for restaurant owners.
The main point of these examples is that there are several pitfalls to avoid when buying a franchise. Please check our lists of 6 High Margin Franchises to Invest In and 10 Best Fast Food Franchises To Purchase. Following, we would like to present you with a list we have compiled of the top 5 pitfalls to avoid when buying a franchise.
If you’ve been thinking about opening your own franchise but don’t know where to start, this is the list for you. Let’s take a look at the countdown.
No. 5: It might not be that easy to leave
Whenever someone buys a franchise, they enter a legally binding contract with a particular business. And, like any other contract, you will be required to adhere to its clauses. You won’t be able to leave whenever you want and, in addition, you might also have to abide by other rules. For example, you may be forbidden to open a similar business for a number of years after your franchise agreement has expired.
No. 4: It’s not really your business
The most important thing you should understand is that, if you buy a franchise you’re not actually acquiring your own business; rather, you are simply paying a fee in exchange for the right to use another business’ name and concept. The best way of looking at it is by considering a lease: when the agreement expires, you’ll have to move on the other things or pay a renewal fee.
No. 3: Assuming it’s not really that much hard work
It is true that when buying a franchise there are certain things you aren’t required to do, like with a regular business, but this does not mean you won’t have to put in a lot of work. If you’re looking into buying a franchise because you’re assuming it’s going to be a walk in the park, it is best you rethink your decision. Regardless of how much support and how many resources will be handed to you, you still have to be willing to put in a lot of effort and time
No. 2: Too stringent regulations
You might be inclined to believe that buying a franchise gives you all the tools and resources you need to conduct a successful business without the hassle of having to do everything on your own. While it is certainly true that your franchise owner will offer you a business plan and ongoing support, sometimes the rules you will need to comply with may just be too much to handle. Before signing an agreement, make sure you know what you are getting yourself into.
No. 1 Pitfall to avoid when buying a franchise: Not recognizing hidden fees
You might be head-over-heels with the great franchising opportunity you have just uncovered, but never make the mistake of overlooking hidden fees. Maybe you don’t need a very significant starting capital for the franchise you’ve chosen, but if it comes attached with impressive ongoing fees, it probably wouldn’t be the best choice for you. Make it a point out of analyzing disclosure documents to look for training and marketing fees, on top of percentage of revenue.