Mitigating the risks of franchise ownership

Yes, even franchise businesses have some risks, but here are four ways to reduce them

The first thing anyone considering franchise ownership should understand is that there is no guarantee of success. This may be obvious but needs to be stated clearly. However, there are some risks that can be controlled. Factors that impact risk are personal attitude and actions, quality of service, time management, and location. They are controllable by you. 

On the other hand, some factors are simply not controllable—for example, a national crisis. In September 2001, I was ready to start a new business, then September 11 happened. For several days I wrestled with the idea of starting a new business. I finally decided that I could not do anything about the catastrophe or its impact on the country and the economy. But what I could control was my attitude, behavior, and how I could use my time. I focused on what I could control instead of what I couldn’t. The economic downturn of 2007-2009 and the Covid-19 pandemic are more examples.  

So what can we control? For starters, we can control the choice to own a business. We can also control which brand to choose and the time put in researching that brand. And once in business, there are many more ways to control your destiny. Here, we take a step-by-step look at the process to mitigate the risk of franchise ownership.

Start with a foundation

Whenever I look at something that I know will have a major impact on my family — such as franchise ownership — I aim to get a good foundation under my feet. Everyone knows what a house is, but few people know how to build one. But we all know it should have a strong foundation. It’s the same in franchising. It’s important to get a strong foundation of franchise industry knowledge and seek guidance from industry experts. Most people know a few things about franchises because they see them, eat in them, shop at them, etc. However, understanding franchising, its truths and misperceptions, why they work, the benefits, etc., requires some research. Talking with experts such as Franchise Consultants, reading books, and visiting tradeshows are a few ways to begin building that foundation. Reading articles by franchise experts will also give you a good start.

Identify a good fit

With a foundation, you can determine if the franchise model of business ownership is for you. So then all you have to do is pick a franchise or two, right? Not exactly—especially if you want to reduce the risk of failure. In this next step, you look for a franchise that fits your skills, abilities, lifestyle, interests, and finances. With around 4,000 franchises in 80 or so industries, finding the right match can be daunting. You can do this on your own or by seeking the guidance of a Franchise Consultant. Mark Pasma’s article, “Why Work with a Franchise Consultant,” gives a great overview of how you can benefit from working with a Franchise Consultant.
            

Do your due diligence

OK, now you’re moving. You have the foundation and understand franchising. You’ve identified two or three franchises that are a good fit for you. The third step is to do your due diligence. This involves talking to franchisors about their business details — what the business is, the owner’s responsibilities, potential revenues, etc. You’ll also receive the Franchise Disclosure Document (FDD). It has detailed information about the franchise.  

Probably the most important part of your due diligence is making calls to franchisees and talking to them about their experience as franchise owners, or getting the “inside scoop.”  The Federal Trade Commissions (FTC) regulates the franchise industry. There are restrictions from the FTC on certain things a franchisor and Franchise Consultant can say; but it does not restrict franchisees, so they can be more forthcoming. You’ll want to engage the services of a CPA to review the financials of the franchise and possibly help you develop a pro forma. A franchise attorney is a must to review the FDD and franchise agreement. There are many details to cover. A Franchise Consultant will walk you through this whole process.  

Follow the system

You’ve gone through steps I – III above and now you are the proud owner of a franchise. Engaging in the training, support, and using the systems and processes the franchise has developed reduces your operational risks thereby increasing the likelihood of success. This is what franchising is all about – having proven systems and processes that others have used to be successful.

Is this process a guarantee of success? Absolutely not. But if you work hard and keep focused on what has been shown to work for others, your odds certainly are greatly improved by mitigating many of the risks.

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Jim Gleason is President of franbizconsultants.com and a member of the International Franchise Professionals Group. He has more than 35 years combined experience in the corporate, counseling, and consulting worlds. Jim is a Certified Business Coach (CBC), a Certified Franchise Consultant (CFC), and a Certified Main Street Business Broker (CMSBB). He is active in his community having served on a number of not-for-profit boards. Jim has been on his church board and currently serves in several ministries in his church.
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