Buying a franchise is full of risks and rewards!
There’s no doubt that a franchise owner enjoys some countless benefits once it takes off prosperously, but what about the first steps to start up a franchise? Are they so easy that anyone can kick-start their own franchise business? Absolutely not. Buying a franchise is somewhat similar to ‘buying a business’ and hence there are lots of risks associated with it too.
It is for this, entrepreneurs willing to start a franchise seek the help of franchising consultants to know the all-round risks involved, compare them with benefits and make a decision wisely.
But before you reach for a consultant, here we’ve tried to give you some idea of the risks associated with franchising.
Franchising needs vast investments
An independent entrepreneur can start a new business with its existing financial resources and keep its operating costs lower till the time it starts yielding profits. However, a franchising business needs a large number of upfront investments that is unavoidable. Apart from that, there are other costs such as royalty payment and advertising costs. Thus, costs for starting a franchise are always higher which means the owner may start in debt.
Regulatory risks
Franchising is subjected to several regulations. Being a part of such a regulated industry, you too need to obey all the franchising laws before and after buying the franchise. So, there are high chances an owner will land into trouble of lawsuits if they fail to comply with any regulation.
Restrictions of the franchise agreement
In addition to complying with the industry regulations, the franchise owner also needs to follow every term of the franchise agreement. The terms or restrictions of the agreement might be on the products or types of services to offer, marketing strategies, location of sales, and even prices. Thus, as a franchise, you can never act or take decisions for your business on your own.
Selling a franchise is tough
In case your franchise does not turn out to be a fruitful venture for you, selling it off to someone else is the best decision. However, selling a franchising business requires a thoughtful process which includes preparing the financial disclosure document (FDD). Besides, you need deeper market knowledge to find a buyer for your franchise.
Now that you have known the probable risks, you might be eager at knowing how to avoid them. Do ask yourself these questions to avoid the risks.
1.Whether there is an existing business model of the parent company and a proven track record of revenues?
2.Will the parent company help in acquiring resources, employees, equipment and even a location?
3.Whether there are flexibilities in product or service offerings?
4.Whether the franchise contract has a limited term? If yes, then what is the process of its renewal?
5.What is the competition or market scenario in your proposed area?
6.How profitable are other franchisees?
7.What are the marketing strategies followed by the parent company?
8.Whether you need to pay royalties? If yes, then how they are determined?
Also Read - How Franchising Businesses Can Stay Compliant
Get help from your franchising consultants to know the answers. Once you find out the answers of each, you will be well able to know all the opportunities of starting a franchise business and hence can make a wise decision.