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Thursday, June 7, 2012

Top Franchisee Missteps and Mistakes



With renewed SBA funding by the current administration, now is the time to start thinking of buying a franchise. If you are looking at buying a franchise, there are common missteps and mistakes that you want to avoid. Most of these are simple and will not cost any additional money, but they are incredibly important to keep in mind as you negotiate yourself through the thick packet of documents know as the Franchise Disclosure Document and the Franchise Agreement. This is our top 10 list of common franchisee missteps and mistakes (in no particular order):

1. Not Reading Everything. To make an informed decision as to whether or not this is a good investment for you, you absolutely need to read every document provided to you. It seems like a daunting task, but it is worth it. This is a legal obligation you are considering and if you don’t know what your obligations are, you cannot make an informed decision and I promise, you will discover down the road that you agreed to something you had no idea about. Don’t be surprised or caught off guard.

2. Not Taking Enough Time. You may feel pressured to read through everything and sign on the dotted line quickly, but the truth is, you have time so take it. Remember, you have at least 14 days before you can sign anything or pay any money.

3. Having the Right Documents.  Make sure you have the most current Franchise Disclosure Document (FDD) and Franchise Agreement. If you are talking to a franchisor in June 2012 but you have a 2011 FDD, then there is something wrong. Remember, the franchisor is under federal and state requirements to have an annually updated FDD to provide to prospective franchisees. 

4. Failure to Understand the Product/Service. The franchise may appear to be a great idea, but do you really understand what you are selling or offering to the public? You need to be comfortable with your business and to know how to sell it. This due diligence step is often overlooked to the detriment of the franchisee.

5. Failure to Contact Current and Prior Franchisees. This takes time, but remember #2 above –take time. This includes calling up all the current and former franchisees in a small system and a lot in a mid-size to large-size system. You need to ask questions such as: a) how is their relationship with the franchisor; b) are there problems with the franchise system that are or are not being addressed; c) do they still feel like it was a good investment; d) what is their revenue; e) any advise in making the decision to purchase this franchise. This is just a short list and there are a lot of questions you can ask franchisees. They are an incredibly valuable resource that is often overlooked.

6. Failure to Have Adequate Initial Financing. While the FDD discloses the amounts estimated to start your franchise business, you need to plan for the unexpected. Not having sufficient working capital while in the initial phase of your franchise business could leave you without a business at all.

7. Failure to Have Sufficient Long-Term Capital. The franchise system you purchase is going to change. You will be expected to remodel, to upgrade software, hardware and equipment, and to possibly rebrand the business –all your own expense. Planning for the future by having planned for long-term capital needs will help sustain your franchise business.

8. Underestimating the Time Commitment. Buying a franchise is starting a business. You have a head-start in that you have a recognizable name, but you are still the owner of your own business and that takes a lot of your time. Make sure you are prepared to dedicate the time necessary to make your franchise business succeed.

9. Not Getting It In Writing. Whether you have an experienced franchise attorney helping negotiate for you or not, you need to make sure you get everything in writing. No matter how great the franchisor is today, if there is ever a dispute, you will wish you had that promise to lower royalties in 6 months in writing.

10. Not Marketing. There is a reason that most franchise agreements require a franchisee to spend money on marketing and advertising. Advertising and marketing works. Products and services don’t sell themselves. And remember, your competitor is spending time and money on marketing and advertising so don’t lose a sale to them.