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Common risks to consider before buying a franchise

| Mar 31, 2020 | Franchise Law

Hindsight is 20-20, but those looking to buy a franchise need to exercise due diligence to get all the information available. This can help reduce the amount of risk involved. However, uncertainty comes in many forms, and one or a combination of several issues can bode ill for a franchisee’s future. This is why it is essential to evaluate all the risk factors before buying a franchise.

Six factors to consider

Every market and franchise has different strengths and weaknesses, but here are six factors that an entrepreneur should consider:

  • Recognizing fads: It is dangerous to jump on to any bandwagon that seems faddish, but those who get in early may be able to get out before the fickle market moves on to other fads.
  • The regionality or seasonality of the market: Determine whether the market can bear the franchise, such as opening a Kansas City style BBQ franchise in such saturated markets like North Carolina or Texas, which each have their distinct style. These differing approaches are regionality. Making it a take-out spot with no indoor seating in an area known for long winters will likely make it seasonal.
  • Local laws: Regulations can drive up the overhead. Checking local regulations and ordinances is a good idea prior to investing in a franchise or a business.
  • Resiliency to economic forces: Some businesses perform better than others in an economic downturn or boom. For example, an RV or boat dealership will depend more on discretionary income than a used car lot.
  • Capital risks: How much capital will the buyer of the franchise need to properly operate and grow the business. The buyer can determine this by examining looking at Item 7 in a financial disclosure document, and speaking to other franchisees in the system. The investor should also evaluate the financial strength of the franchisor by reviewing its published financial statements contained in the franchise disclosure document. If accounting is a challenge for the buyer, hire an accountant to look at the data.

No amount of planning is a guarantee

The franchisee can do his or her due diligence, but at some point, a decision will need to be made. Those looking to move to the next step of investing in a franchise may wish to discuss the potential transaction with an attorney with experience handling the acquisition of a franchise. An experienced franchisee attorney may be able to structure agreements that can further reduce potential risks.