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Entering a franchise agreement is a significant decision. It offers the possibility of business success but requires substantial investment and can carry various risks. As a prospective franchisee, you must ensure you are well-informed to avoid the common pitfalls others in your position make that can lead to costly mistakes and unnecessary challenges. This article will explain several common mistakes prospective franchisees make when entering a franchise agreement and how you can avoid them.
1. Not Conducting Thorough Research
One common mistake prospective franchisees make is not conducting sufficient research into the franchise opportunity. This error can potentially result in the loss of their investment, for example, if their location does not perform as well as expected.
For instance, you might feel drawn to invest in a popular restaurant franchise without full knowledge of the competitive landscape in the intended franchise location. This lack of understanding can lead to poor sales performance if several similar restaurants operate nearby, saturating the market.
To mitigate the risk of encountering this pitfall, ensure that you conduct comprehensive research into the franchise opportunity. Your research should cover aspects such as:
- the franchised brand, including its business model and overall reputation;
- the franchisor;
- the industry; and
- market conditions and competition.
You can also speak with current and former franchisees to gain insights into their experiences.
2. Underestimating the Financial Requirements
Underestimating the franchise opportunity’s cost can strain your finances and affect your business’s operations. Costs will likely include the following:
- initial fees;
- ongoing royalties;
- marketing contributions; and
- additional fees such as inventory and equipment.
To avoid underestimating the opportunity’s financial requirements, you should carefully review the documents the franchisor provides. Ensure you understand the payment structure and total scope costs associated with the opportunity. If the costs are unclear, speak to the franchisor.
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3. Failing to Seek Legal and Financial Advice on a Written Agreement
Prospective franchisees who fail to seek professional legal or financial advice risk making poor investment choices and facing unfavourable terms. To avoid this, set aside a budget to seek professional advice.
Discover the key legal and commercial issues to consider when buying a franchise.
A lawyer, for example, can review the franchise agreement, identify potential risks and help you negotiate more favourable terms if necessary.
4. Overlooking the Terms of the Franchise Agreement
The franchise agreement is a legally binding contract between you and the franchisor. You should ensure that you understand its terms. Franchisees who do not understand the terms of the agreement risk signing an unfavourable contract they are bound to for several years.
To avoid this mistake, read the franchise agreement thoroughly and understand its terms and conditions. Pay close attention to clauses regarding territory, duration, renewal and termination. A lawyer can also help you understand the agreement, breaking down your legal obligations and rights.
Key Takeaways
The decision to enter a franchise agreement is more than a business decision. It is a commitment to invest your time and effort into a new business and build a long-term working relationship with a franchisor. Avoiding the common mistakes prospective franchisees make is crucial to ensuring your future as a franchise business owner is successful.
The following table outlines some common mistakes and how you can avoid them.
| Mistake | How to Avoid the Mistake |
| Not conducting thorough research | Ensure that you thoroughly research the franchise opportunity. Your research should cover aspects such as the franchised brand, business model, franchisor and relevant market conditions. |
| Underestimating the financial requirements | Closely read the documents the franchisor provides you and determine the fee structure and any additional costs you might need to pay. From here, you can decide if the opportunity suits you in light of your financial circumstances. |
| Failing to seek advice | Seeking legal and financial advice can help determine whether the franchise opportunity is a sound investment. Setting aside a budget and seeking advice from an experienced advisor can help mitigate risk and protect your interests. |
| Overlooking the terms of the franchise agreement | You should ensure that you fully understand the implications of the franchise agreement’s terms. A franchise lawyer can explain the terms, identify potential risks and negotiate with the franchisor. |
Remember that once you sign the franchise agreement, the success of your franchise is not just about avoiding mistakes. It is also about leveraging the full potential of the franchise network and the resources at your disposal.
If you want to enter a franchise agreement and want legal advice, LegalVision’s experienced franchise lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.
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