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9.5 Mistakes To Avoid When Buying A Franchise!

Questions To AskHaving been a franchise sales consultant for the last 20 years, I think I have seen almost every mistake a would-be business owner can make when deciding which franchise to buy. In fact, the most common mistakes are almost always predictable. Having owned three franchises myself, I’ve made my share. Now to be fair, most people purchasing a business today are doing so for the first time and probably don’t know what they don’t know about how to buy one, and that is understandable. Sometimes mistakes are valuable, and experience and wisdom are acquired. However if the mistake is a large one, you may not get a second chance to correct it.

All of that said, owning a franchise can be a wonderful and profitable experience. Don’t let the fear of making a mistake stop you from looking at and researching an opportunity. Just make sure that your search for the right franchise is done carefully and with a process and be aware of and avoid the common mistakes so many people make.   Here are 9.5 of the most common mistakes I see people make when buying a franchise. Actually, much of this applies to the purchase of any business, franchise or not.

1. Financial Overextension

Yes, there are some great stories out there of entrepreneurs who mortgage everything and max their credit cards to start up a business and are wildly successful. Now, quit dreaming and think about buying a business you CAN afford. The number one reason businesses fail is that they simply run out of cash before they have enough customers and cash flow to support the business. Running out of money in your business is like being in first place at the Indianapolis 500 and running out of gas after 499 miles. No matter how well you were doing up until that point, if you can’t cross the finish line, you lose! A competent financial professional can help analyze your financial picture, determine your net worth and advise you on how much money you can and perhaps should spend on buying a business. Of course, your comfort level regarding capital expenditure is most important and needs to be considered along with your financial wherewithal.


2. Starting the business without knowing where you want it to take you

Would you jump in your car and begin driving without knowing where you are going? Of course not! (Not on purpose anyway, but some of us are beginning to have those senior moments… like walking into a room and forgetting what you are looking for). Nor should you buy a business without knowing where you want it to take you. Yet many people do. To my way of thinking, a business is simply a vehicle to take you somewhere. So, where do you want to go? Do you have an exit strategy? Do you wish to own a business that can be operated absentee? Do you want to build significant equity? Generate high income? Employ your family and become a family business? Do you want the business to be passed down to your children? Provide part time income? Not all businesses are capable of taking you where you want to go. Answers are available by asking the right questions and doing the right research.

3. Buying a franchise because it is an easy way to start a business 

Yes, buying a franchise gives you a great head start and makes a business start-up easier. The blueprint for success is already in place. That said, starting any business is hard work, franchise or not. Success is never guaranteed! Buying a franchise will help to mitigate your risk, but your mindset should be that you will have to work long and hard, especially in the beginning, to make the business successful. Be conservative in your thought process when planning for business ownership. There will be surprises. However, good planning makes for smaller surprises, and smaller surprises are usually better. If you know in your heart that you can do what it takes to make a business succeed no matter how challenging it is, then you are well on your way towards business ownership success.
4. Going it alone without using experts and building a team of advisors

Sometimes we don’t seek expert advice because we simply don’t want to hear anything that doesn’t agree with our hopes. Big mistake! If something is really wrong, it’s better to find out before you’re already deeply invested both financially and emotionally. On the other hand, if something is wrong, it may be easy to fix if found early, so the advice you get could be the perfect “ounce of prevention”.

When buying a franchise, you are buying the experience and game plan of a successful business model. But, you still need a team of local advisors and experts to help you with some important initial decisions and to keep you and your business pointed in the right direction.

Who should be on your team of advisors? First you will need an experienced franchise attorney to review the franchise offering documents and set up your corporation. You will need a good accountant to set up your books and provide tax advice. You will also need a good insurance broker, a good financial planner and maybe even a business coach who asks the right questions and keeps you on a game plan. Yes, you are spending some serious money to start your business. but don’t let that prevent you from also spending the additional money needed for good business advice. The right advice from the right people who are knowledgeable about franchising and business ownership can be a lifesaver. Think of it as insurance to help protect you against some predictable disasters!

5. Forgetting to write a business plan

When buying a franchise, some of the business planning has been done for you. After all, you are buying a business model that has been tested and operated successfully by other franchise owners. However, that shouldn’t prevent you from taking the time to write your own business plan that speaks to profit and loss, cash flow, local competition, local demographics, industry growth, industry trends and viability. If you intend to finance part of your business, your financing partner will want to see a plan anyway.

Great sources of information about your local market, industry trends etc. can be found at your local Chamber, on the internet, at the library and in industry reference books. Here in Charlotte there are many free resources to help you including SCORE. The Institute for Entrepreneurship at Central Piedmont Community College, the Small Business and Technical Development Center, and the Small Business Resource Center. In addition, there are some reputable and reasonable fee-based companies that do some of the research for you and provide an outline of a business plan complete with industry and competitive statistics. Finally, many franchise companies will assist you with writing a business plan if you are serious about researching their company. You have the resources to write a business plan so take the time and invest the effort to do so.

6. Picking a business that doesn’t utilize your skill set      

Many of my candidates today bring a comprehensive set of skills to the table that can be used in running their own business – sales, marketing, operations, purchasing, people management, organizational skills and others. Many have acquired these skills working within a corporate structure and are now ready to try them out on a small business. And, many of the franchises and business opportunities available may require a combination of these skills.

If you are seriously considering purchasing a franchise, make sure that the skills needed to own and operate the business align with your skill set. If the thought of cold calling on other businesses to sell your products or services is something you dread, and the franchise you are looking at has a large sales component, don’t buy it. You may be more comfortable in a retail or service business where customers come to you.   On the other hand, if you love being “out there” networking, selling and marketing, you may be bored owning a retail business.  If you do not wish to manage a large number of employees, you may want to stay away from service businesses that generate revenue by selling “labor” and that grow by adding more employees. All this seems like common sense, but in my experience, I have seen too many people whose expectations for business success have not been met because they are running a business not suited for their skill set.

7.  Skimping on the research

It should be obvious, but researching any business before you buy it is very important. One of the true advantages of buying a franchise is that there is much unbiased research you can perform before making the purchase. All too often, many of my clients want to skimp on research because the business looks so right or feels so good or because they can’t wait to get started in business ownership.

Don’t skimp on the time it takes to do the research! Buying a business is a big decision and requires thoughtful and painstaking research. I tell my clients to be prepared to complete 4 to 8 weeks of research before drawing any conclusions and making a decision to purchase.

The franchise company you are interested in can often provide you with a good deal of research material – industry trends, statistics, and success and failure rates for their business and similar businesses. In addition, a great deal of helpful research content can be found in the Franchise Disclosure Document (FDD – A kind of prospectus on the business required by the FTC) that is provided to you when you first make a serious inquiry into owning a franchise.   But, the best research tool a franchise can give you is the name and number of every other franchise owner in the system. What do these owners know? Everything! People who are already in a business are your best source of information. When doing your due diligence, it’s important to find the people who are doing well in a franchise as well as to find people who are struggling. Talk to them and gain an understanding of why their performance is what it is. Compare your skills and desires with theirs. Who are you most like, the winners or losers?

If you know the answer to that question and are honest with yourself, you will know whether or not the business is right for you by taking the time to talk with and visit other owners within the franchise system, your best source of relevant research information.

8. Allowing your dream of business ownership to be ambushed

If I had a nickel for every time I heard this: “Mike, I really like the way this business looks but I was talking to a friend of mine the other day and he said that I probably couldn’t make much money in this business. Now I’m confused.” Guess what? You’ve just been ambushed!! Now what do you do?

Unfortunately, it’s a jungle out there, and all kinds of ambushes are just waiting for you. Knowing where they are or where they will come from will allow you to be ready and take action.

Ambushes come in all forms – your family, well-meaning friends or acquaintances, analysis paralysis, and even your own cold feet. Common sense will tell you that you need to have the buy-in and support of your spouse and family up front. They are affected by your decision to buy your own business. Once you have that, your research needs to be based primarily on the information supplied by the people who best know the business – the current owners and perhaps others who have an intimate knowledge of the industry you are considering or the product or service you want to sell.

Even if you can avoid these ambushes, the infamous analysis ambush awaits you. Some people just can’t get enough information to feel comfortable “pulling the trigger”, no matter how much research they do. Even a very thorough job of researching a business opportunity will leave some unanswered questions. You must recognize that there is inherently some risk in buying any business, even a franchise. Good research mitigates the risk. And, finally, you should expect to get nervous before purchasing a business – everyone does. This is a redirection of your life as you know it. However, if you still like the business and the business model still makes sense after all the research, you’re ready to go.

9. Falling in love with the product or service.

If you are passionate about new age crystals and aromatherapy, cycling, natural foods, rebuilding cars, woodworking or whitewater rafting… GREAT! Just don’t assume that owning a business that provides these products or services is the right business for you.  When you enjoy a certain type of product (“This place has the best yogurt in town!!”), it’s natural to assume that you may want to own a business that sells that product. However, owning that business may require you to do some things you don’t like or are really not good at. You may or may not have the skills and temperament necessary to be successful.

When researching a business, you need to gain a thorough understanding of what you will be doing all day every day. Your dream may be to have a team of good employees doing the detailed work and the day-to-day tasks that are necessary to make a business run. However, most young businesses will demand that you work there for at least the first few months or even the first full year to help build cash flow. Can you take it, or will you find out that the love you initially felt for the product was only short-lived lust, soon gone when you got involved in the day-to-day grind?

Being passionate about something is great. Pursuing a business that allows you to “Do what you love” is a worthy goal. However, given your individual circumstances, it may be better to leave your passions to be enjoyed away from your business. The business you own should operate with a sound business model that best utilizes your skills and has the potential to meet your personal and financial goals. What you need to be passionate about is… owning and running your own business.

Practically speaking, it is impossible to take all the risk out of going into business for yourself. You will make mistakes.   Avoiding as many mistakes as possible can certainly help you move the odds of success in your favor. Buying a franchise is a great way to help reduce the challenges associated with starting a business, but it is no guarantee of success.

So, if you are to have your dreams fulfilled, approach the opportunity of owning your own business with your eyes open, and with the strength of knowledge gained from planning and research.   Avoid these major mistakes and you will greatly increase your chances of buying the franchise or other business that is right for you.

 

Michael Hall is President and the Owner of FranNet Carolina, a company specializing in matching potential business owners with the right business opportunity. He can be reached at mhall@frannet.com or 704-522-9394.

 

 

Mike Hall

2 Comments

  1. MIke, Those are thorough, detailed and excellent suggestions. No wonder, you have done so well throughout the years. I am impressed. Gerry

  2. Mike very relevant article. Your 9.5 tips are something that every potential franchisee should do before entering an agreement. Nothing beats first hand experience and you share your knowledge well

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