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Top 5 Things NOT to do When Investing in a Franchise

Thursday, February 02, 2017
As a franchise broker, I have heard a lot of horror stories about franchise disasters. In no particular order, these tend to be the common denominators.

1. Fall in love with a business that you’ve been to – and decide to buy one.

A lot of people suffer from “love at first sight” by falling in love with a business that they’ve visited, and then they find out it’s a franchise. This is often the first franchise they’ve researched (and by research I mean they’ve eaten/shopped there), and think it would be great in their town.

Falling in love with a business you’ve visited or heard about can cause a very costly mistake by investing in the wrong franchise for your future. There is confusion between a great business model, and the RIGHT business model for you – based on your strengths and lifestyle objectives, background and a host of other factors.

If you have a franchise concept in mind, that’s OK – and a great place to start.  Then as you are evaluating it, think about what it would be like to be an owner of that business – do you have the skills and background of the typical owners?  Does that business offer a quality of life that is attractive to you?  Is it in your budget? 

The bottom line is that going about franchise selection this way is somewhat backwards.  Instead, speaking to a professional consultant who can guide you towards concepts based on your strengths and goals (not to mention being in your investment range) is a more logical approach.

2. Making a hasty decision without enough validation 

Franchise validation is one of the key methods used to evaluate franchise options.

During validation, you contact current franchise owners (the franchisees) and/or if possible, meet with some of them in person, to ask as many questions as possible. You will want to ask questions that will provide clarity as to what you should expect as a franchisee.

Some good topics to start with (after the basics of how long have you been open, etc.) would be:
  • What is the level of on-going training and support that is provided?
  • Are the marketing, advertising and promotional programs effective?
  • What was your total investment - was it more or less than you expected and why?
  • How do you generate business (or leads)?
  • What do you do on a daily basis?
Then you can move on to the financial questions you really want to know, by asking permission to ask some money questions:
  • How long did it take before you were cash flowing on a monthly basis?
  • How long did it take for you to pull out a salary?
  • May I ask what your net profits were last year?
These questions will get you to a better understanding of the positive side of the business, but don’t forget to ask about the negative parts of the business too. It’s always better to be prepared, and to remember that no business is perfect – what are the things you won’t like about this one.

3. When the perfect opportunity is staring you in the face – stall and do nothing

Fear can make the perfect opportunity slip away if you don’t act on it. Fear can sometimes get in the way of making a decision or taking action even after you’ve done your research.

At the end of the day, it comes down to trusting your instincts. You put yourself on this path (to becoming your own boss) for a reason. Ask yourself, if I do nothing – will my situation improve a year from now? There’s never a perfect time to start a business, but maybe this is the time for you to take a leap of faith and go for it.

4. Cut corners, and save some money by not engaging professional help

People tend to make this mistake for many reasons. They might be feeling too strapped to outlay the additional cash required to hire a professional accountant or a lawyer - or they don’t feel the need. However, it is crucial that you hire a CPA/Accountant (preferably with a lot of franchise experience and clients) who can help you evaluate income projections – based on what you’ve heard in validation, as well as in the disclosure document, and help you develop the numbers side of your business plan.

Similarly, a good franchise attorney (not your uncle Bob who drafts wills) will interpret the agreement you’re about to sign, and point out any red flags that you may want to try and get modified before you move forward.

So while working on your finances and figuring out the type of investment required, budget funds to hire professionals who will help you review the necessary documents to avoid making the worst mistake of your life. 

5. Fail to have appropriate capitalization

This common mistake can stem from not properly researching concepts or speaking with professionals to determine the true start-up costs and what is required to open a franchise or business. And because of this, one of two things can happen. Either people go in being inadequately capitalized or they end up with too many resources by borrowing or raising large sums of money that are not actually required.

If you begin under resourced, it could result in you not adequately marketing your business, resulting in a tepid launch – or worse.  Then down the road you could run through your working capital, before the business has had a chance to ramp up or cash flow. This can cause panic as you try to raise money in a hurry – never at favorable rates.

On the other hand, if you end up raising a lot more than what is required you might have extra money that is not needed to begin with. With borrowed money, you can end up paying more interest than was needed.

BIO

Previously with a large Wall Street firm, Jane Stein was a Certified Financial Planner for over 25 years, and provided comprehensive wealth management solutions for a large base of families – representing over 250 million in assets. She wrote an investment column, and established a program called “Money Matters for Women”, in an effort to empower women to take charge of their investments. Now she helps men and women achieve financial security through business ownership, which is far more empowering.  With her financial background, she is uniquely qualified to guide you through the process to identify and evaluate the right business model, and then later can help you secure funding to open your business. Jane Stein is the founder of Your Franchise is Waiting, a consultancy firm for men and women exploring franchising as an alternative career path.

https://www.linkedin.com/in/franchisehelp

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