Generally speaking, the franchise business model is a good one. Over the years, it’s enabled thousands of people to start businesses.
Those businesses have brought much-needed revenue to city coffers. They’ve also provided employment opportunities for people residing in areas where these franchises have opened.
But here’s the thing; franchising isn’t perfect. Not every franchise owner (franchisee) is successful. Some do great, some do average, and some end up going out of business.
With this in mind, it’s important to know what can go wrong if you decide to become the owner of a franchise business. I’ve listed 3 things that can go wrong, below.
Financial Problems
In my experience, a lot of the money problems that some franchisees experience can be easily avoided.
One of the most common financial problems usually happens during the first few months of their businesses being open.
The problem: A lack of capital. Both working capital and what I call “living” capital.
As a franchisee, you must always have enough money on hand to pay for things like inventory, supplies, taxes, payroll and more. And a young business usually doesn’t have enough revenue coming in to cover everything. That’s why you have to have plenty of working capital. If you don’t, you’re going to be in trouble.
The solution: When you’re talking to franchisees who are already in business (as part of your research), ask them how much working capital you really need to have on hand. They’ll tell you.
As for “living” capital, unless you have a working spouse who makes enough money to pay all of your continuing household expenses, you’ll need to set aside at least 6 months of capital to pay those living expenses. Don’t forget!
Family Issues
When you decide to start pursuing franchise opportunities-instead of looking for a job, it’s important to share what you’re thinking of doing with the people who matter.
My recommendation: Talk to your spouse/significant other before you start a serious search for a franchise to buy.
It’s especially important for you to do this if you’ve lost your job.
That’s because most people (after losing a job) hit the pavement to look for a new one.
And losing a job brings with it very powerful emotions that the entire family experiences. Anger, fear, and sadness are the first ones that come to mind.
That’s why it’s important to get everyone on the same page.
If you can’t, if there’s a lot of resistance, you may want to rethink your idea so you can avoid major family problems. You can always revisit the idea at a later date.
Legal Difficulties
First things first. Hire an experienced franchise attorney before you sign a franchise agreement.
I’m not trying to frighten you. I just want you to be aware of what your legal and financial responsibilities are when you become a franchise owner.
It’s important for you to know that franchise agreements (contracts) are written by skilled attorneys who specialize in franchising-from the franchisor side of the table. These agreements are not always easy to understand.
In addition, although you’re not going to want to discuss it, you do need to know what your liabilities would be if your franchise business fails. Namely, you need to find out if can you be sued by your franchisor, and if so, for how much.
In the final analysis, you need to do whatever you can-ahead of time, to insure your success as a franchise owner. Like:
- Having enough working capital and living capital to make it through the first several months of being in business.
- Sharing what you’re thinking of doing with your spouse/significant other. Getting their buy-in is crucial.
- Speaking to a competent franchise attorney so you know exactly what the franchise agreement states.
Best of luck in your search for the right franchise.
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