5 risk factors to consider before purchasing a franchise
Purchasing a franchise can provide the owner with a long-term, source of significant income. Once you’re past the franchise fee and other startup costs, the income you make can far outstrip the operating costs. However, there are always risk factors to consider before purchasing any franchise. A smart business person will consider all of these before making a decision.
Many franchises go through popularity booms and dips. A relatively new chain of stores may currently be very popular and seem like a great investment, but you need to consider long-term staying power. Most often, well-established franchises with proven experience and popularity are better choices than new businesses which may be just a fad.
Time and place
Any good business researches its customers, and you need to as well before deciding to purchase a franchise. Especially consider the region you’re in and the seasonality of the business you might get into. Some franchises thrive only in certain areas and/or at certain times, and this is an essential aspect to consider.
Every business needs to consider the laws and statutes in place before they do anything, and potential franchise owners need to do the same. Are there any local or federal laws in place which might prevent the franchise you want to open or affect it in any other way? A good example of this is cannabis: legal in some states and circumstances but illegal in many others.
When considering buying a franchise, you need to consider the franchisor’s finances, not just your own. The franchisor needs to have the capital to meet future growth plans, or your franchise may end up stalling and dying out. The franchise disclosure document contains information on how well-capitalized the franchisor is, and should be read very carefully by anyone considering getting their own franchise.
Resistance to recession
The American economy has seen its share of ups and downs lately, and potential franchisees need to consider the risk of another recession before agreeing to buy a franchise. Franchises that offer luxuries or discretionary services (as opposed to necessary ones) could be hit very hard in a recession and end up losing the owner money.