Risks of buying a franchise

Despite all benefits, buying a franchise might bring some risks and potential pitfalls as well. Generally, franchisee’s disappointment might arise from three main sources – franchise, franchisor or franchisee himself. Let us dig deeper in each of these.

Risks associated with a franchise

Franchise might become a source of dissatisfaction for a number of reasons including these:
 

  • Irrelevant business model. Some of the business models, which serve as a foundation for a franchise, might be simply irrelevant in a given market under given circumstances. In one case, demand for specific products or services in different countries might be so different, that the franchise that is successful in one country might face extremely low demand in another. In other case cost structure that allows profitable operations in one location might become unbearable in other location due to, for example, higher cost of labor, rent or logistics. Quite often the pricing policy becomes a source of irrelevance, when, for example, franchise from a wealthier country expands to less prosperous country and fails to adapt its prices to the buying power of the target region.
     
  • Poorly documented franchise. Some franchisors are unwilling to invest into quality of their operating manuals, quality standards, training programs and other means of assisting franchisee in replicating franchisor’s business successfully. Franchisee, that will buy such a franchise, might find it hard to replicate a business model and exploit the benefits of franchisors’ “know-how”. Franchisee’s compliance with poorly documented standards could also become a source of conflicts with a franchisor simply because it is quite difficult to follow the rules that are described unclearly and unprofessionally.    
     
  • Fake franchise. Nowadays there are so many franchise opportunities out there and they are promoting themselves so similarly, that one might easily got himself misled by a “fake” franchisor. “Fake” franchise stands for a franchise that either does not exist in real life apart from its marketing material (this is pure fraud) or is built unprofessionally and is based on a business model that is neither proven nor successful. Best way to avoid “fake” franchises is to take your time to analyze comprehensively all information about the franchise that you could possibly get from the franchisor, other franchisees and public sources of information.

 

Risks associated with a franchisor

Franchisor might cause some serious troubles for franchisees as well. Some of them are:
 

  • An inactive franchisor. This means a situation when the franchisor is reluctant in constantly upgrading its franchise and its business model to meet ever-changing needs of its customers. Franchisors, that avoid reacting to market changes and does not pay enough attention to improvement of a franchised business, might lead all their franchisees to failure due to customers turning their backs to the stagnant business and bringing their money to competitors instead.
     
  • Over-demanding franchisor. Some franchisors are so obsessed with the perfection of their business system and so much believe in their own business wit, that they tend to dictate their decisions to the franchisees in all possible fields of business and rip them off their independence, inherent to being a business owner. Franchisor might even force franchisees to invest their time and money in implementing even the most ridiculous franchisor’s ideas. In a long run, it might lead to stagnation of the franchise network due to lack of franchisee’s motivation or even to its downturn due to overinvesting in execution of wrong business decisions.    
     
  • A franchisor without a spine. Despite the fact that franchisees are very dependent on the franchisor, often the franchisor feels strong pressure from franchisees’ as well. Unfortunately, some franchisors are not able to ensure that their franchisees are strictly complying with the rules and standards of the franchise network. Franchisor, who is not controlling its franchisees properly, eventually will face a downfall of customer service and/ or product quality within the network followed by falling customer satisfaction or even penalties from controlling institutions.
     
  • Underperforming franchisor. If a franchise network grows very fast, a risk may arise that the franchisor will not have enough time or resources to provide proper service and assistance to all of its franchisees. Unluckily, focusing on recruiting new franchisees rather than on fulfilling its obligations to existing ones is not so rare, especially among newly established franchisors. Franchisor’s failure to dedicate enough time and resources to serve and control each of its franchisees as well as to develop the essential infrastructure of the franchise network, may result in a poor performance of the franchisees coupled with a poor customer service. These could lead to negative consequences ranging from decreasing of franchise brand value to even a bankruptcy of the franchisees.  

 

Risks associated with a franchisee

Finally, sometimes franchisees could cause a damage not only for themselves, but also for a franchisor and other franchisees in the network. This might happen in these situations:
 

  • Exaggerated expectations. Sometimes franchisees tend to expect more from a franchisor than the franchisor may give. A franchise is an effective measure for building a profitable and sustainable business, however it does not automatically guarantee a business success and does not revoke franchisees’ duty to work hard and take full responsibility for its own business results. Even though the franchisor will help to achieve desired results, the major contributing factor for the success of the franchise unit is the actual owner of the unit – the franchisee. 
     
  • Wrong attitude. Franchisees and franchisor are interdependent of each other. Franchisees, who are unable to comply with the predetermined rules and do not follow the recommendations of the franchisor, eventually, will destroy the partnership and loose the rights to use the distinct features of the franchise. If one doesn’t bear the third party control, while cherishing his or her creativity and independence, then it is better for such a person to stay away from franchising and, maybe, start an own independent business without getting mixed up with franchisors.
     
  • Mismatch in competences. Two types of mismatch in franchisee’s competences might occur. Franchisee might be underqualified or overqualified for running a specific franchised business. Many franchisors tend to say that they will train any franchisee to run franchised business properly. However, at least basic franchisee’s competences in specific field of operations and in business management might be vital for running a business. On the other hand overqualified franchisees, that have a vast previous experience in running a business, might find it hard to “unlearn” their way of doing things and adapt to franchisor’s standards and procedures.
     
  • Underfinancing. Failing to secure funds, that are sufficient both for covering investment costs of opening a new business unit and for financing operational costs until the break-even, quite often becomes a major distraction for newly established franchisees. As a rule of thumb, people are overoptimistic when calculating a total amount of cash needed - they tend to overestimate their own financial and borrowing capacity, underestimate costs and overvalue income and profit projections. Unfortunately, such groundless optimism (or should it be called frivolity) in finance planning might lead to severe consequences from longer period of ROI to even bankruptcy.

 

If a person clearly understands all opportunities and risks, associated with buying a franchise, and is still enthusiastic about becoming a franchisee then it is time to go through the process of franchise acquisition.

 

  • Check our presentation about buying a franchise here >>>>
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  • Download the e-book “Buying a franchise – highway to business success” here >>>> 
  • If you have any question, fell free to contact us here >>>>

 

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