Managing Partner
Purchasing a popular business franchise can be a great investment. As the franchise owner, you benefit from the recognizable branding of the chain and its marketing campaigns. You may also get better prices for supplies because the chain can negotiate lower prices for bulk buying.
While there are many benefits to owning a popular franchise, there are also risks that come with it. Before you sign a contract to become a franchisee, you should understand some of the common risks in franchising.
You should also have a business lawyer or financial advisor look over the franchise agreement and analyze its viability.
Is the franchise a fad?
When you’re investing in a franchise, you’re investing in its future appeal. Established brands like McDonald’s or Jiffy Lube, which have been in business for years, have evolved to remain popular with their customer base. Or, they’ve created a niche for themselves with a reliable product that’s consistently appealing to customers.
Newer franchises may not have brand recognition behind them. They may be part of a popular fad that dies out after initial interest. There are advantages to getting into a fad early on, especially if you have a great location for your business. But keep in mind that the fad could lose steam, and plan accordingly.
Is your business seasonal?
While some franchises offer “evergreen” goods or services, others have a greater appeal during certain times of the year or in different parts of the country. There could be a good reason why franchises of certain brands aren’t in your town or region–there just isn’t enough consistent demand for the franchise to profit.
If you launch a franchise in a new geographic area, be prepared to invest more time and money in marketing. Your potential customers may be unfamiliar with the brand and more reluctant to try it. Or, the demand may only be there for a season.
If you’re starting a snow-cone business in Chicago, for example, be prepared to have your business drop off sharply in the wintertime.
Recession-Proof Businesses
Some businesses are more resilient than others during hard times. Those that provide necessary goods and services, such as grocery stores or health care, will naturally do better than those where the main service or product is considered frivolous or indulgent.
Spas and jewelry stores, for example, may see a more significant drop in revenue during recessions.
Capital Risk
Any business investment comes with financial risk. Purchasing a franchise involves a substantial financial outlay, including licensing rights and other start-up costs like equipment, training, and supplies.
Before investing in a franchise, ask to see the company’s Franchise Disclosure Document (FDD) or the last few years of financial statements. An accountant can point out potential weaknesses in the business or any additional risk you may be taking. They can also advise you on whether the franchise is a good investment.
Following Government Regulations
Businesses are subject to certain government regulations, depending on the kind of business they are and where they’re located. Each state is different, too, and the employment and operation laws may make it harder for some franchises to survive.
Established franchises tend to have a better understanding of governmental regulations, and may have established best practices for new franchisees. However, newer franchises or businesses may still be figuring out how to comply with government regulations and present a bigger risk.
As with any business, opening a franchise has its own set of risks. While the appeal of investing in an established business can feel like a safe bet, it’s still important to have professional legal advice to ensure that you’re prepared for any risks you might face.
At Woods Lonergan, we’ve served New York City business owners for years. When you want to understand the risks of franchising, reach out to our skilled business attorneys.