Avoid these 3 Mistakes when Buying a Franchise

Buying a franchise is often the first option of new entrepreneurs for many reasons: it is risk-limited and based on a proven success-formula.  

A quick look on the Franchise Europe website and you’ll find there are 13,500 franchise brands currently operating in Europe, in almost 20 industries and requiring investments between euro 1,200 and euro 1 million. It’s definitely plenty to choose from!

Let’s say you have already chosen your franchisor. Before starting the procedures for buying the franchise, take a step back and learn how you can ensure your business is off to a good start.

Here are 3 mistakes when buying a franchise and what you can do to avoid them:

Mistake #1

Not making market research

You wouldn’t buy your car without doing research about its security systems, safety ratings and additional costs, would you? Well, the franchise is also a serious investment and you should spare no effort to learn as much as you can about it so you can make an informed decision.

Point Franchise recommends you perform a market research which will provide you with answers to the following vital questions:

• Is there a need for this business?

Does it respond to a current market demand? There’s no point in investing in a franchise whose products or services are no longer needed in the market.

• Who is your target market?

Refine your target market criteria and look to focus solely on your intended demographic. Measure the size of your market so you can write financial forecasts. The goal of your market research is to void the temptation of addressing an audience of ‘everyone’ – everyone means catering to the needs of no one. So get specific and narrow the scope of your audience.

• How will you appeal to your target market?

Perform market segmentation to split your audience into pots of opportunity based on a geographic, demographic and socio-economic perspective. It is vital you understand your potential customers’ lifestyles, beliefs and behaviours. Knowing your customers’ needs and pain points allows you to develop a targeted message that is delivered at the right time. This will ultimately result in higher response rates which equal more sales.

Mistake #2

Not researching the franchisor

Now that you’ve done your market research, it’s time you put the spotlight on your chosen franchisor. Take your time to conduct your own investigation on the franchisor, be objective and try to learn as much as you can about it.

Here are a few questions you should ask yourself via Franchise.org:

• Does the franchisor have adequate staff, resources and trained personnel to meet its commitment to you?
• Is the franchisor profitable?  
• How long has the franchisor been in business?
• Is their business being supported by continuing royalties or is it coming mostly from initial franchise fees?  
• Has the franchise been growing? Are new locations being added on a regular basis? How many locations closed in the last year? Why did they close?  
• Does the franchisor have a litigation history?
• Does the franchisor have an active research and development department that introduces new products and services?

Mistake #3

Not fully understanding the status of a franchisee

What is your status as a franchisee?

The legal relationship between a franchisor and franchisee is primarily a contractual one based on the franchise agreement the parties enter into as two independent business people.

As a franchisee, you are in control of your business, but you are not independent:

• You must offer only approved products and services;
• You are expected to operate the franchise in strict compliance with system operating standards;
• You must advertise and promote the franchise according to the guidelines provided by the franchisor.

So there’s no room for adventures and going for uncharted territories. You are expected to trust your franchisors and walk the same paths.

Have you ever considered buying a franchise?