Owning a franchise is not for the faint of heart. The idea of being your own boss plus the upfront costs and extra obligations to a corporate business, can be downright frightening.
With Halloween around the corner, it’s the ideal time to talk about some of the scary realities that come with owning a franchise. Before jumping into the business, make sure you are aware of these three hard truths:
1. Losing Your Money
It takes courage to write a large check for the upfront franchise fee and sign on the dotted line for a small business loan. And, if your franchise requires a physical location, such as a retail or office space, there’s also that matter of signing a lease.
With so much cash going into a business before it even opens, some people get worried they made a poor choice in the franchise they purchased and will lose their money. The reality is they’re right: It could happen. They could lose their investment — franchise buyers do make mistakes.
One way to prevent the mistake of choosing the wrong franchise is to make sure you are a good match for the franchise. Ensure your professional skills, personality traits and budget are aligned with the franchise you’re interested in purchasing.
TIP: I’ve found the people that do their homework at the beginning of the franchise purchasing process and during the research phase, end up increasing their chances of success as franchise owners.
2. Not Having Customers
Often, when you open your franchise, you’ll have a grand opening celebration, an event designed to showcase your new franchise business. Local civic and business leaders are usually in attendance, and there may even be a ribbon-cutting ceremony. People (a.k.a potential customers) are milling about inside your shiny, new location. There’s a feeling of excitement in the air: You just know this is going to work.
Until the novelty wears off and slow days ensue. Or slow weeks — with few, if any, customers. Talk about being scared. What if you can’t pay your rent? What if you can’t meet payroll?
The reality is your new franchise business will experience some slow periods: It’s perfectly normal. It’s pretty rare to see a new franchise business open up and stay busy all the time. If you happen to own a franchise that’s been non-stop busy since day one, I’d love to hear about it.
TIP: Famed British author Lee Child said you have to “hope for the best, plan for the worst.” That should be your mantra as a business owner. You need to plan on having slow periods. Have some emergency funds set aside so you can meet your expenses. That way it won’t be as scary when there’s a business slowdown.
3. The Franchisor Goes Belly Up
While it’s rare to see a franchisor go out of business, it does happen occasionally. But should you really be scared it could happen to you? The answer: It depends.
For example, if you are interested in becoming a franchisee of a young franchise concept (anything less than two years old), I would suggest having a serious conversation about franchisor bankruptcy with a franchise attorney before you sign your agreement.
It’s not that young franchisors are more likely to go under. It’s just that because they’re young, they don’t have much of a track record yet. So, you may not be able to talk with a good number of franchisees as part of your research (when possible, I advise talking with 10 to 15 existing franchisees) because it’s a young system.
Keep in mind, there are also plenty of older franchise chains that have filed for bankruptcy over the years. Some of them, like these major franchise food chains, ended up doing just fine after the dust settled. Others, like Friendly’s Restaurants, have emerged from bankruptcy but aren’t awarding franchises presently.
TIP: Make sure you have done as much research as possible. If available, talk to current franchisees and look at comparable business models to see how they have fared. Also, consult with professionals, including attorneys, to make sure you know the ramifications and your responsibilities if the franchise goes out of business.
Business ownership can be frightening at times. Try to plan ahead so that you’re covered if scary things happen.
The author is an Entrepreneur contributor. The opinions expressed are those of the writer.
Joel Libava is a franchise ownership adviser best known as The Franchise King®. He is the author of Become A Franchise Owner! The Start-Up Guide To Lowering Risk, Making Money, And Owning What You Do (Wiley 2011).
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