The 6 Biggest Blunders in Buying a Franchise

You see a cool franchise concept and you hear that it's opening up everywhere. It's so exciting in concept and it's growing so fast, you say “Let's buy it!” After all, it must be amazing if there are so many people that are buying this franchise. 

Wrong! HUGE MISTAKE!

So this is where we give you a little background of our personal story. You see, we did exactly the above, we heard about a cool fast-growing franchise and we jumped right in. Many others didn’t fare well and were out within 2 years, but it has been 16 years now and we continue to own this franchise. And yes, we are extremely successful and profitable with it. We’ve actually been the #1 franchisee in the system since we began. The secret to our success? More on this later.

Today, we help aspiring business owners find the PERFECT franchise. 

We’ve taken our “lessons learned” to educate and coach you in building your dream business. If you’re looking to buy a franchise, make sure you read - and re-read - these 6 biggest blunders in buying a franchise so you don’t make the same mistakes.

1. Blunder Number One … Chasing Shiny Objects

Now that's not to say that the franchise isn't as exciting as it may seem, but just because a franchise concept is growing fast and popping up everywhere, it doesn't mean that it's a great business opportunity. And another point to that is you may not enjoy the business. Sometimes we have the tendency to chase shiny objects, right?

Just because a franchise is growing fast, doesn't mean that it's a great business. It doesn't mean that it's even profitable. Sometimes when franchises are growing really fast, there's no history or data to be able to provide the history of what their performance has been up to that point. Or in the case of the franchise we acquired in the foodservice industry that the franchisees were even reporting their true revenues. The second point here that is super crazily important is that after the honeymoon is over you may not like the franchise concept or the business you’ve invested in at all. So just because it seems exciting, because it's growing fast and you feel like you're going to miss out on an opportunity, don’t feel like you have to do what everyone else is doing. It’s kind of like Mom saying “If Johnny jumped off a bridge, would you do it also?” 

Make smart, informed decisions. There’s a reason there’s an FDD. There’s a reason you need to do your validation and speak to other owners. Do your homework and you’ll be less likely to be guilty of this blunder.

2. Blunder Number Two … Not Working with a Franchise Consultant or Franchise Coach

So back to our story.  Interestingly enough, 16 years ago in which we acquired this franchise that we still continue to own and operate today, we hired a Franchise Consultant to help us in our franchise selection.  We had just come out of a business that we started from scratch, grew for 10 years and sold. 

We were having a mid-life crisis … what’s next? 

This franchise coach did a thorough analysis of our skills, interests and resources and came up with 3 choices for us to look at that were all quite different, and ‘yes’ Subway was on the list at that time.  We are not going to mention any names here, but we ended up going with a ‘cool’ (Shiny Object) and rapidly growing coffee and smoothie concept. Again, more on this later.

So blunder number two, is not working with a franchise consultant, franchise broker or franchise coach, or as we call ourselves Franchise Placement Specialists. With over 4000+ franchises out there today, our role is to help aspiring entrepreneurs find the perfect franchise to match their skills, interest and goals. 

To help you understand what a franchise consultant/broker/coach/specialist is, think about your process of buying a house. You would likely hire a real estate agent to help you find and purchase the house of your dreams. A franchise consultant or a franchise coach is similar.. They help you in the buying process of finding the perfect franchise. The keyword here is ‘help’. Generally speaking, franchise consultants and coaches are compensated by the franchisors, so in general and in our case their services are of NO cost to you.  In other words, they will ‘help’ you find a franchise one that's in their inventory and they receive compensation from the franchisor for matching you up with the perfect franchisor. 

Two things to keep in mind: we don't sell anything, we only help educate, coach, and help you find the answers to the many myriads of questions you will likely have going through this process. The fact of the matter is that you can’t buy a franchise. Franchises are awarded. We used a very precise process to help our candidates which you can learn more about here. Check it out and see if it makes sense for you.

There are over 4,000 franchise concepts available today. Think about that. That's a lot of franchise concepts. So imagine how difficult and overwhelming it can be trying to figure out and look at so many different franchise concepts and start to filter down and really figure out what makes sense for you, your financial situation and the amount of money that you want to make. The whole process can be really overwhelming and stressful. 

If you need help finding a franchise or you're in the middle of the process of buying a franchise and you just feel nervous, you feel like you don't know what questions to ask, or you feel like you don't know where to start, then reach out to me or my team. You can shoot us an email over to info@nextlevelfranchisegroup.com and tell us about your situation. 

3. Blunder Number 3 … Choosing a Franchise Just Because You’re Passionate About the Products

Sure, you may love cupcakes, but does that mean you should open a cupcake franchise? Be wary of choosing a franchise just because you're passionate about the products. 

Overall, I think finding a business that you're passionate about is pretty deceptive because you can be in a business that you're super passionate about, that you absolutely love the products or services, and make no money. We have seen it many times. Choosing the perfect franchise is about the intersection of passion and profit with the franchise or business. The question is where do those two intersect, and how do you figure out a business that meets your needs financially and that you feel a true connection? 

It definitely helps to be passionate about your franchise business, however, back to our story. We mentioned earlier we still run our franchise business today after 16 years and the number one reason is because as a whole we are still passionate about the product and the concept. The issue in the beginning though was definitely the profit. You see this franchise offered little in the way of direction, marketing, distribution and even less when it came to assisting their franchisees on making a profit. 

We found this out the hard way, beat our heads against the wall for several years and one day made our own solutions to this tricky dilemma. That took many years and much blood, sweat and I literally mean tears to get to this point though. It was only because of our previous business experience, I believe, that we are still operating today. We have always been tenacious and resourceful, but when you are purchasing a franchise you are paying not to have to count on these qualities 100% for survival and success. 

Moral of the story: Don’t buy a franchise just because you are super passionate about it. I can assure you we would appreciate a do-over, but we know that is not possible.

The term we like to use is that you have a connection to the business. That’s it just a connection, what you have to be super passionate about is being in business for yourself, and what is your why. If the franchise business will help improve someone's quality of life, then you feel a sense of connection to that business. So thinking that you have to be in a business that is fully aligned with your experience or that you're passionate about is the worst decision you can make when buying a franchise.

4. Blunder Number 4 … Not Considering the Real Cost of Financing

Let’s start with the sad fact that most businesses, including franchises, fail due to a lack of capital. We almost became part of that statistic. At our heyday with our franchise business, in less than 2 years we had 3 store locations, 3 food trucks and 6 mobile indoor units to do indoor events and catering with.  Sounds great right. The American Dream. Grew like gangbusters! Then boom, the 2008 financial crisis hit like a ton of bricks. To get to this point we had to accumulate a lot of debt (financing) which now was a huge liability to the business in a time where our revenues were down significantly from just the year before. There is more to this part of the story, so reach out to us if you want to hear the full details, but ultimately the lesson learned here was we grew too fast and outgrew our capital resources. 

When people are looking to buy a franchise, ultimately they will wind up at some point reviewing item 19 of the Franchise Disclosure Document. Many franchises will report only gross profit numbers here. I bet you guessed it, that does not include the cost of financing (debt costs) amongst other things. Now some franchise disclosure documents will show you actual profit and loss statements of a franchise location, but most of them will not, so be careful to make sure you are getting the full financial picture of the operating profits possible with each franchise you investigate, and make sure at least some of them include financing costs. They can be significant.

5. Blunder Number 5 … Buying a Franchise That Does Not Operate Corporate Locations Themselves

Our franchise was a unique concept with different business models. They were great at the mobile or portable business module with mobile kiosks and food trucks. The founders of our Franchise operated these units themselves personally as well as at the corporate level when we came on board, but fixed brick and mortar store locations not so much. They had never opened nor operated a brick-and-mortar location, yet they were bringing in a lot of new franchisees who wanted a physical store location. This is where the slope got slippery for many in this franchise system.

Typically the way a franchise concept gets started is that you have a business where there's a team of people who run one, two, three, five, 10, 15, or maybe even 20, 30 locations. And after having a proven model and system of that business, working, profiting, making money, operating successfully for a number of years, then they go out and decide that the best way for them to scale and grow is to franchise the business. A fantastic concept I think we all agree on.

Unfortunately, some of these franchise businesses out there have never really operated their own corporate locations to prove out and refine the business model. They came up with this concept/idea and they just start franchising right from the start. Now it's not to say that any of those businesses cannot be good opportunities and may not make money. That's not what I'm saying, but what I'm saying is “don't be the guinea pig for someone else's concept”. If they really believe in their new concept and they want to start a bunch of locations, let them do that. Let them at least open up one or two or three locations before you're their guinea pig with franchising the business. You can thank us later.

6. Blunder Number 6 … Purchasing a Franchise Just to Chase the Dollars and Cents

There are a lot of private equity companies in the franchise space that go in and buy companies and it's all about the numbers, or all about the supply and demand in the market. And sometimes in the process, franchisors will get you really excited about how much money you can make. Technically, they're not supposed to do that. Actually, it's against the law. They're not allowed to make financial representations. Worse yet a lot of times franchisors are very deceptive in their item 19, where they only show gross profits.

We have seen it time and time again, where franchise candidates don't know that gross profits are usually not close to the actual bottom line of the business because there's a lot of other expenses that come after your gross profits. And so people see that number  and like, "Oh my God, I'm going to be rich." Oh, I feel sorry for those people. It's a deceptive number. So choosing only purely from a gross profit potential is a grave mistake.

Think about it a bit. Say you make a decision to buy a franchise that you don’t particularly love, but you're only mildly interested in, but you don't have a ton of belief in (no why), and only for the sole reason that you think you can make a lot of money. And then things get tough one day. What do you think happens to most of these franchisees at this point? They want out, and they want out fast at any cost. Not the way to make a profitable franchise enterprise. 

There is profit as in hard dollars and cents and there is profit as in does it give you “fulfillment?” Does it help you achieve your “why”? That’s not always about the money. The “why” for us was why we are still operating our franchise 16 years later. Through thick and thin, we came back to our “why”. We wanted a business that brought smiles to people’s faces, that provided a job to those who really needed it, and at the same time put money in our pockets. We’ve built a business that accomplishes all three.

The most successful franchisees are those where the profit potential and the connection to the franchise business are in perfect alignment. 

So if you want someone in your corner to help you through the process of buying a franchise who can speak from experience and from the heart, reach out and contact us today! We’ll do everything we can to make sure you find the perfect franchise.