Investing in a franchise can be a great way to unleash your entrepreneurial spirit while reducing the amount of risk associated with starting your own business. After all, as you prepare to open your franchise, you’ll receive a lot of support from the franchisor, and you’ll be able to rely upon the name recognition and goodwill that they’ve built up in the public sphere. While all of this can make startup and marketing easier, potentially leading to higher profits, the franchising process and its associated business dynamics aren’t always as beneficial as business owners think.
In fact, there are multiple risks associated with taking on a franchise opportunity. If you don’t recognize them and think through ways to mitigate them, then you could lock yourself into an unfavorable and costly agreement. You certainly don’t want that to happen, so let’s look at some of the challenges that you might face as you develop your strategy for opening a franchise.
Common risks associated with opening a franchise
There are a lot of issues that can arise during the franchising process. Here are some that you’ll want to be sure to address so that you don’t end up on the losing end of a franchise deal:
- An improperly negotiated and drafted franchise agreement: The franchise agreement is the cornerstone of your business operations. It’ll spell out everything from territory to use of copyrights and trademarks, as well as fees and the use of proprietary systems. If you skimp on your review of this document and lack an understanding of its terms, then you’re bound to get locked into something that isn’t right for you. So, make sure you carefully read the proposed franchise agreement, seek clarity when needed and try to push for more favorable terms.
- Relying on misrepresented claims: Franchisors oftentimes present financial information to potential investors in hopes of selling them on the idea of becoming a franchisee. For example, they may offer speculative projections of the profits you could make or lay out best and worst case scenarios. You need to scrutinize these assertions and ask questions to ensure clear understanding. Sometimes these numbers are inflated, and you don’t want to make your decision on bad information.
- Misreading market trends: A business that seems hot right now may end up being a seasonal fad. But if you’re locked into a franchise agreement for a fading business, then you could lose out on a lot of financial resources. So, make sure you have a strong understanding of where the market is at and where it’s going before agreeing to buy into a franchise.
- Misunderstanding the amount of support you’ll receive: The franchisor should provide you and your staff with training, support and quality control measures. But many franchisors fall short here. If you don’t recognize that before signing your franchise agreement, then you’ll be on the hook for keeping your staff and your services in line with the franchisor’s expectations. This might be challenging to do under the circumstances, and it could lead to unwanted litigation.
Know what you’re getting into before signing off on a franchise agreement
Investing in a franchise can be lucrative if done correctly. But to be successful, you have to sidestep a lot of landmines that can pollute the process. Therefore, before taking the plunge with a franchise, be sure to understand the legal landscape and what you can do to protect your interests. If you’d like to learn more about how to do that, then we encourage you to discuss the matter with your attorney.