It may seem like a great opportunity to buy into a franchise business, but you also need to be aware of the pitfalls.
Getting into a formal agreement with your franchisor can be a precarious process.
The formal agreement can be pretty hectic. Make sure you do not rush this process. You need to understand the pros and cons as well as what you are liable for.
As this is a legal agreement, you can get into a lot of trouble if you renege on the contract or any part thereof.
Requirements and restrictions
Franchise agreements have stringent requirements of how you have to run the business. There is often little room for creativity or introducing your own flare. The deal dictates aspects like décor, uniforms, processes, and suppliers.
Location and products
Many franchise businesses have locations that you can operate in. However, it is not so easy to expand or grow. They will dictate where you can open your next business. They also tell you what you can and cannot sell from a product perspective.
These can also expand to suppliers you can use.
Bad performance penalties
There are always checks and balances in place. You will get audited, and if you are not adhering to specific standards, there will be penalties and even a loss of the franchise. The franchisor is all about protecting their reputation.
You are always going to be sharing your profits with the franchisor. At no stage do you get to own the business outright.
First right of refusal
The franchisor can also refuse to renew your contracts if they don’t believe you add value to their business. It can be an expensive exercise if you cannot sell your business at the end of the contract.
They own the location
Often, the franchisor owns the location of the business. Therefore, if you wanted to get out of the agreement, you would need to move premises.
Royalties for life
During the covid shutdown, some franchisors reduced the monthly royalty fees, and some did not. It meant that the business had to pay royalties even though they were not trading. As part of the agreement, you need to have contingencies in place for business interruption.
You need to have good management to ensure you follow the rules and check you are getting into business with the right personalities. Greedy franchisors can make for an unpleasant experience.
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