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6 mistakes to avoid when you buy a franchise

Sarah Stowe

Buying a business is an exciting step towards a dream of running your own show.

If you have decided to align yourself with a franchise brand and plan to invest your savings or take out a loan to fund this, it’s particularly important that you get the pre-purchase process right.

Here are some common mistakes that newbie franchisees can make – and they can trip up the best-intentioned franchisee.

6 common mistakes when buying a franchise

1. Assume the franchise will be a success

You’re buying into a brand – probably one that is well-recognised and established – so obviously your business can’t fail, right? Unfortunately, there really is no such thing as a guaranteed success.

If you’ve picked a good franchise model with evidence of successful franchisees, then you’re off to a good start. But each franchise unit requires the right location or territory that can deliver customers, appropriate rental costs, a process for sourcing or attracting clients and a committed franchisee.

That’s just to get you up and running, whether you buy a brand new site (greenfield location) or purchase an existing business.

As a franchisee you will undergo brand-specific training before you start – it’s always wise to make use of any ongoing training programs and learning opportunities.

2. Believe that all the hard work has already been done

You have all the right things in place – a good brand, great location or territory, excellent operations manual, strong training program, a clear marketing program with relevant materials, a reliable supply chain.

Your franchisor has done all the hard work, and knows through trial and error what has worked for the brand, and what has failed to produce the right results.

As a franchisee you are leveraging that knowledge – and it is one of the most attractive elements of buying into a franchise.

However, if you leave it at that, and expect the business to roll in of its own accord, you’ll be disappointed.

There is no shortcut to success. It’s simple hard work. Plus a customer-centric approach, an understanding that you are responsible for the growth of your business, a willingness to learn from fellow franchisees and the franchisor, and some financial acumen.

Getting to grips with the numbers at the heart of your business will be essential; you will probably get assistance with your business growth from the business development or area manager, but you need to be on top of your profit and loss and cashflow.

3. Buy with the heart, not the head

You love everything about the brand, you’re passionate about joining the network of franchisees, and the franchisor is keen to get you on board quickly. That’s fantastic. But have you checked out the financials?

  • Are you confident that the business model will deliver the returns you need in the chosen location?
  • Can it work in a year’s time when you decide to step away from the business and need to add more staff?
  • Have you considered an exit plan that will make the experience and hard work worthwhile?
  • Have you shared your business plan, existing data and any financial projections with an accountant?

Before you even get to the position of talking to a lawyer or accountant, it is to be hoped that you have spent time on researching not just the brand and the franchisor behind it but the potential of the sector and any trends in the market.

It’s wise to do as broad a search as you can, rather than relying on what the franchisor tells you.

4. Take shortcuts with research and advice

Franchise buyers will always seek advice but not always from the most experienced sources. It is important to have the backing and opinions of your friends and family but they may not fully understand the implications of buying a particular franchise.

In the same way, turning to your family lawyer or a best mate’s accountant will give you some feedback on the purchase but not from a franchising perspective.

A professional well versed in franchising can provide valuable insights drawn from their years working with franchise agreements, understanding the Franchising Code of Conduct, referencing court cases and case studies that have set precedents.

Of course it costs to get good advice – but it costs more to make a mistake that results in a bad business decision.

5. Misunderstanding franchisee responsibilities

The most common cause of disputes in franchising is a misunderstanding between the franchisee and franchisor.

It is crucial that in conversations with a franchisor there is complete clarity about the respective roles and responsibilities.

  • Do you fully understand what the franchisor expects of you?
  • Are you really listening to what the franchisor is telling you about the business opportunity or hearing what you want to hear?
  • Are you confident that you can rely on the franchisor to provide what you need?
  • Have you got a clear understanding of what the Franchising Code of Conduct outlines in terms of rights and responsibilities?

6. Underestimate the costs of getting started

The fundamental equation in franchising, like any business, is that you invest to reap financial rewards. You want to exit your business with more funds than you have spent on the business but it’s not uncommon for franchise buyers to miscalculate the costs upfront.

Consider all the costs for legal and accounting fees, paying tax and superannuation, any registration fees, leasing costs, insurance; check with the franchisor what costs will be coming up over the term of your agreement (new equipment, store refresh) and budget for them.

Ensure you have enough working capital to see you through the early days, weeks, months. Otherwise successful businesses can come a cropper through simple cashflow problems.

When you buy a franchise you are committing your time, money and energy into a project designed to put you in a better financial position and perhaps bring you a much longed-for lifestyle change. Give yourself the best chance of getting it right.

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