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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. Potential new regulations can prove tempting if a new market opens up.
  • 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 do this by examining financial statements in a financial disclosure document, and they should also run a credit report on the franchisor and affiliated companies. 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 their due diligence, but at some point, they will need to make a decision. Those looking to move to the next step of making an offer may wish to discuss the potential deal with an attorney with experience handling the purchase of a franchise. They may be able to structure agreements that can further reduce potential risks.