The 4 Easiest Ways to Lose Your Entire Franchise Investment

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If you have been searching for a perfect franchise opportunity and think that you have found it, make sure to avoid the costly mistakes that franchise buyers often make.

Below, in no particular order, are 4 costly mistakes that can easily be avoided and save you time and money.

1. Incomplete Background Check:

Most franchise buyers do not take enough time to look into the history of a franchise before buying. Skimming the franchise documents and talking to the corporate owners is insufficient.

This is the equivalent of buying a house after speaking to the seller and the seller's agent, but failing to complete a home inspection. It is vital that you visit with other franchisee owner-operators in and around the geographic location in which your franchise will be located. If there are none, speak to other owner-operators regardless of geographic location.

Perhaps the single most important part of a background check is talking to current and prior owners of the franchise. Don't let blind faith and the excitement of the opportunity short circuit your due diligence.

2. Poor Understanding of Business Model:

I am amazed at the number of franchise buyers that fail to understand the business model that serves as a foundation for their business. And, no, having a clear understanding of the service or product you provide is NOT the same as understanding the business model.

To have a complete understanding of your business model, you must have an exacting knowledge of cost structure, expenses, revenues, profits, inventory, staffing, and overhead.

You must have a basic understanding of how to read and interpret balance sheets and profit/loss statements. Understanding these key financial metrics is essential to understanding your business model and will dramatically improve your likelihood of success.

3. Lack of Professional Assistance:

Reading about a franchise opportunity on the internet, speaking with the franchisor, and attending a Discovery Day is NOT the professional assistance I am speaking of.

Buying a franchise business the right way requires that you seek accounting, insurance, banking, and legal assistance. Though this may add to the cost of the purchase, it is well worth it if the counsel you seek is well-versed in franchise and small business matters. And, please, stop going to your cousin's uncle's brother-in-law that is a family law attorney for franchise and small business advice.

You wouldn't go to a pediatrician for knee surgery, so why would you go to an attorney that does not practice in the area in which you need expertise. Don't be pennywise and dollar foolish.

In the end, you will end up spending more on each or going bankrupt.

4. Undercapitalized:

This is a huge problem for franchise buyers. From an expense perspective, think of buying a franchise like going on vacation, it is going to cost 2-3 times more than you think.

Trust me, it will!! If you do not have sufficient cash on hand, the ability to raise capital through friends or family, or a line of credit or other loan source sufficient to get your business through downturns, you will fail.

Make sure you speak with a trusted advisor experienced in small business money matters so you get off to the right start.

The honeymoon period ends quickly, make sure you are ready for the financial realities of the small business world.

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About this Entry

This page contains a single entry by Josh Brown published on April 24, 2013 5:13 PM.

When Should You Convert Your Business into a Franchise? was the previous entry in this blog.

How to Improve Your Franchise Sales Process - The Recap is the next entry in this blog.

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