How to Avoid Franchise Pitfalls

Running the franchise of a popular product or service can be very satisfying for those individuals who want to put their entrepreneurial abilities to good use. In many ways, it is better than starting an independent venture as you will receive initial training from the franchisor and on-going guidance on a range of issues related to the business. While making good money as a franchisee is definitely a possibility, it is not as simple as it is made out to be by franchisors in their advertisements and documentation. Some of the areas to watch out for before committing yourself to a franchisor are: Fees and charges – There are a number of expenses that you will have to bear. In addition to the front-end franchise fee, you will have to pay a periodic royalty, which may be in the region of 5% of sales. You may also be required to contribute towards advertising and publicity costs. Of course, all these amounts exclude the initial investment for premises, equipment and inventory. It is crucial that you consider the implications of all the financial commitments that you are making before you take a final decision. Estimate your future earnings realistically – Do not accept the figures furnished to you at face value. If you are given the average sales that a franchisee makes in a year, it may be a good idea to understand whether the amount is high because of one or two franchisees who have very extensive operations. It is also possible that some territories generate vast sales while the area that you are being considered for has a much lower potential. Take into account the fact that you will be new to the business and several months or, even more, may elapse before demand picks up. Make your business plan and your sales projections on a conservative basis. This will probably give you a more accurate picture than just following the franchisor’s figures blindly. Establish contact with existing and former franchisees Talking to franchisees who have been operating for several years can be a real eye-opener. You will get an idea about how the business really operates. Ask them how long they took to achieve financial break-even and about the type of problems they faced.If the franchisor is reluctant to let you speak to the existing franchisees it should raise a red flag. If it is possible, try and contact someone who previously held the franchise of the company that you are considering. It is likely that you will receive a frank opinion about how the franchisor operates. This will help you understand what you are getting into. Documentation Most people do not study the franchise agreement carefully before signing it. This can be the single biggest mistake a new franchisee can make. If there is a dispute, the language in the agreement will assume great importance. Franchisees should also study the Uniform Franchise Offering Circular (UFOC) issued to them. This is a regulatory document that provides a wealth of information. Do your homework If you are considering taking up a franchise opportunity being offered by a large company that has been in existence for many years, you can assume that they have well-established procedures for new entrants. But if the franchisor has been in business for only a year or two and has only a limited number of franchisees, you should take extra precautions. Take the advice of a lawyer to understand what you are committing yourself to. It is also advisable to sign any guarantees only after you completely grasp their monetary implications.

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