Although franchising can be highly rewarding, it’s always wise to understand its risks, just like in all other types of businesses. Buying a franchise instead of building your brand from scratch has its advantages.
Finding the right franchise comes with added security because you’ll be guaranteed that the business model is proven. However, always remember that all businesses have a certain degree of risk. To understand the risk associated with a master franchise opportunity, you should seek the assistance of a skilled master franchise lawyer in the U.S.A.
5 Risk Factors to Consider When Buying a Franchise
The following are some of the risk factors to consider when buying s franchise
- Fads
Although most successful franchise brands have been in business for many years, that doesn’t mean that franchise startups cannot excel. That said, you should take the time to investigate any franchise opportunity that comes your way. This allows you to assess the longevity of such an opportunity and ensure that it’s not just a passing cloud or a fad.
Never hesitate to join a new booming franchise market – just be cautious when approaching considering the venture. Although there are many advantages of grabbing opportunities earlier, you can’t also ignore the risk associated with new opportunities. That said, always weigh your options by looking at what you’re expected to invest and have a recovery plan if things don’t work out as you expected.
- Region and Season
Any product can thrive, provided it’s in the right place and season. For instance, you might think that opening a franchise in a market that is not established or saturated gives you an edge, and no doubt it can. However, the success of a product depends on many factors, such as the industry, local preferences, and more.
The type of business you’re interested in may not be located in a certain location for some reason–meaning that you may also not succeed if you go against the grain and start operating in that location. On the other hand, you should be prepared to advertise and promote your products more, which is an added expense. With that in mind, consider if the franchise opportunity is worth extra marketing.
Seasonality can also be a great risk to consider in franchising. For instance, seasonal businesses perform well in peak months and the revenue companies get during peak seasons can see them through the off-peak seasons. This means that prospective buyers should be prepared to hit the ground running during peak seasons and save for bad months. Alternatively, you can promote a secondary product to provide an extra income stream to sustain the business when profits aren’t low. Planning for the off-peak seasons will help keep the cash flowing.
- Recession Resistance
In times of hardship, some businesses outperform others because certain products and services are still necessary regardless of economic status. For instance, the demand for food, health care, and education is not likely to go down even when a person is struggling financially. On the other hand, discretionary purchases are likely to be shunned during tough times.
Determining whether the products and services of a business are essential or optional is should be considered when buying a franchise. You should also evaluate the financial history of the franchisor carefully.
- Capital Risk
All businesses involve financial risk and that’s why you should always ensure you have the capital to meet all financial obligations, such as training costs, salaries, and others. If possible, you should evaluate the Franchise Disclosure Document (FDD) of the franchise you’re interested in, focusing on recent performance disclosures in the financial statements. You can involve an accountant to help you spot red flags and weaknesses in the franchised business, and unexpected risks and make informed choices.
- Government Regulations
External factors, such as government regulations are hard to evaluate but they can impact your business significantly. The truth is that every business is regulated by government restrictions and it’s not easy to foresee changes that can be caused by current events. Emerging businesses have a higher risk of falling victim to government regulations that could impact a business negatively.
It’s always wise to invest in well-known and experienced brands because they’re typically based in established industries that are not easily affected by changing laws and regulations. When investing in a small franchise, always remember that risk isn’t tied to a single factor. In other words, the result of multiple risk factors affects your investment. Ensure that evaluating potential risk is part of the due diligence process before signing on the dotted line.
Before starting or buying a franchise, it’s important to assess the risks associated with that business. That said, a legal professional specializing in franchise law can help you with this.
