Joel Libava
When looking at franchises for sale, there are lots of franchise buyer mistakes you can potentially make. 7 of them, actually.
But, before I go into the details of what they are, here are some key takeaways:
- Research the franchisor’s financial health, not just their marketing materials
- Speak directly with current and former franchisees about real earnings and challenges
- Understand total investment costs beyond the initial franchise fee
- Have a realistic exit strategy before you sign anything
- Negotiate contract terms where possible – they’re not always set in stone
Now, let’s dig in, so you can become a smarter franchise business buyer.
The Reality Check Every Franchise Buyer Needs
Buying a franchise tends to feel like purchasing a business in a box.
The marketing brochures show smiling owners, impressive revenue projections (sometimes), and testimonials about financial freedom.
But here’s what they don’t tell you: franchise ownership is still business ownership, with all the complexity that entails.
That said, most franchise buyer mistakes occur in the research phase. They fall in love with a concept or get swept up by aggressive sales tactics without doing the hard work of due diligence. Let’s change that.
Franchise Buyer Mistake #1: Falling for the “Proven System” Myth
Every franchisor claims they have a “proven system.” But proven where? Under what conditions? With what kind of franchise owner?
Here’s your reality check: a system that works in suburban Texas might fail spectacularly in downtown Boston. Market dynamics, local competition, and demographic differences matter more than most franchisors want to admit. So, pay attention to the differences.
Your Defense Strategy:
- Request territory-specific performance data
- Ask for contact information of franchisees in similar markets
- Understand local market saturation levels
- Research your competition independently
Franchise Buyer Mistake, #2: Ignoring the Franchise Disclosure Document (FDD)
The FDD is full of data and facts. but, a lot of franchise opportunity buyers either skip it entirely or give it a quickie read. I don’t recommend either.
That’s because this 200+ page document contains everything you need to know about the franchise’s financial performance, legal history, operational requirements, total and ongoing costs-and more.
Critical FDD Sections to Scrutinize:
- Item 19: Financial Performance Representations
- Item 20: Outlets and Information About Franchisees
- Item 3: Litigation History
- Item 4: Bankruptcy Information
Don’t just read these sections – analyze them.
For instance, what’s the franchisee turnover rate? How many locations have closed? What legal issues has the company faced? Are there any ongoing cases now?
Pro tip: use your favorite search engine and type in the name of the franchise you’re interested in followed by “current legal issues” or “lawsuits.” See if anything comes up.
Finally, here’s a neat trick my dad taught me about reading the FDD.
Franchise Buyer Mistake #3: Underestimating Total Investment Costs
The initial franchise fee is just the cost of entry.
In my experience, most buyers severely underestimate their total investment and working capital needs.
Hidden Costs That Catch Buyers Off Guard:
- Equipment and inventory beyond initial estimates
- Marketing and advertising fund contributions
- Real estate deposits and improvements
- Working capital for the first 6-12 months
- Professional fees for lawyers and accountants
Smart buyers create a comprehensive budget that includes 20-30% more than their initial estimates. Cash flow problems kill more franchises than bad concepts. Sometimes.
Franchise Buyer Mistake #4: Skipping the Franchisee Interview Process
Franchisors will give you a list of references – their best performers who’ll sing the company’s praises. That’s not enough. You need the full picture.
Your Franchisee Interview Strategy:
- Contact franchisees not on the reference list
- Speak with recent purchasers (first year owners)
- Find franchisees who’ve sold their locations
- Ask specific financial questions about actual earnings
- Inquire about franchisor support quality
The questions that matter: “What would you do differently?” and “Would you buy this franchise again knowing what you know now?”
Pro tip: use the 50+ franchisee interview questions contained here to get the real answers to your most burning questions.
Franchise Buyer Mistake #5: Accepting Non-Negotiable Terms
Franchise agreements are typically presented as take-it-or-leave-it contracts.
In essence, while major terms usually aren’t negotiable, smaller provisions often are – especially if you’re buying multiple territories or have significant business experience.
Go here to see what’s typically negotiable.
Other Potentially Negotiable Elements:
- Territory exclusivity boundaries
- Marketing fund contribution percentages
- Renewal fee structures
- Transfer restrictions
- Non-compete clause duration
Finally, an experienced franchise attorney can identify negotiation opportunities you’ll miss on your own. Hire one!
Franchise Buyer Mistake #6: Overlooking Your Exit Strategy
Nobody buys a franchise planning to fail, but smart buyers plan for various exit scenarios from day one.
For example, how transferable is your franchise? What are the restrictions? What will affect your business’s resale value? Can you sell anytime you want?
Exit Planning Essentials:
- Understanding transfer approval processes
- Knowing buyer qualification requirements
- Planning for territory development and growth
- Building systems that don’t depend solely on your presence
Franchise Buyer Mistake #7: Misaligning Personal Goals with Business Requirements
Franchises aren’t passive investments. They require specific skills, time commitments, and management styles.
for example, a food service franchise demands different capabilities than a business services franchise.
Honest Self-Assessment Questions:
- Do you have the required time commitment?
- Are you comfortable with the operational requirements?
- Does your financial situation support the investment timeline?
- Are you prepared for the franchisor’s level of control?
The Due Diligence Checklist That Actually Works
Smart franchise buyers approach their research systematically:
Financial Analysis:
- Verify franchisor financial statements
- Analyze franchisee performance data
- Calculate realistic ROI timelines
- Stress-test your business projections
Operational Assessment:
- Shadow existing franchisees during operations
- Understand day-to-day management requirements
- Evaluate supplier relationships and costs
- Review training and ongoing support quality
Legal Protection:
- Engage a qualified franchise attorney
- Understand your state’s franchise regulations
- Review all contracts thoroughly
- Plan for dispute resolution procedures
Your Path Forward as an Aspiring Franchisee
Franchise ownership can be an excellent business strategy, but only when you make informed decisions based on thorough research rather than marketing promises. Let me clarify.
The difference between successful franchise owners and those who struggle isn’t luck – it’s preparation. They ask harder questions, dig deeper into the numbers, and make decisions based on data rather than pure emotion.
With those things in mind, your franchise business ownership journey deserves better than common mistakes. Take the time to do this right, and your franchise investment will thank you for years to come.
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