Franchising can be an excellent way for beginner entrepreneurs to start a business. Marketing costs are usually less as you no longer need to build the brand’s reputation. Trial and error costs are reduced since the franchisor has borne this cost for you. They have also worked out the business’ processes, procedures and financials.
However, not everything is perfect in the world of franchising. You need to look out for some pitfalls if you are pursuing this type of business. These pitfalls can lead you to waste your capital or fail the franchise.
Watch out for these issues
Like every business venture, franchising has pros and cons. Not every franchisor will have your interests at heart. Here are the four most common pitfalls in franchising:
- Territorial rights: Some franchisors do not care about location quality and will not give you exclusive territories. The result? You and other franchisors cannibalize each other’s market share.
- Unreasonable performance requirements: Many franchisors require minimum sales targets, which may result in penalties or even franchise loss if not met. Knowing if the required sales goals are reasonable can help avoid losing money on targets set intentionally high to gouge you.
- Hidden fees: Some franchisors do not disclose all the costs upfront. You need to read the fine print and identify what may be missing from the presentation. There can be fees for renewal, marketing, product delivery, technology transfer and so on.
- Termination clauses: Most franchisors have termination clauses that are favorable to them. Most beginning entrepreneurs do not always recognize these clauses as unfair and agree without realizing the danger.
Most franchisees often need more time to discover these mistakes. Once they have already spent money on the capital and cannot back out, they are trapped in a sunk cost fallacy, desperately trying to recover their investment while erroneously believing there is a path to profitability.
Beyond reading the agreement carefully
Negotiating a fair and reasonable agreement takes experience. Understanding a franchise contract’s financial and legal aspects can be complicated for a fledgling entrepreneur. Our firm offers free consultations. Having an experienced counsel to advise you can help you better navigate the waters of franchising.
