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Carefully evaluate the risks before investing in a franchise

by on General

Becoming a franchisee can be an exciting and rewarding business venture. In many cases, purchasing the rights to operate a well-known and established brand can bring great revenue opportunities and the promise of potential rapid growth.

But before you put down any cash or sign on the dotted line, it is crucial to review all business documents to ensure that they are fair, comprehensive and valid. It is also essential to consider several potential risk factors that could jeopardize your investment.

Potential risks to consider

Success or failure as a franchisee is usually not tied to a single factor but instead depends upon many considerations that could impact your investment. Before you commit, it is advisable to consult with an experienced franchise law attorney who knows how to weigh vital issues such as:

  • Financial risks: First of all, does the franchisor have the capital to meet its obligations and growth projections? You, and your lawyer, must scrutinize the franchise disclosure document (FDD), which reveals the financial health of the franchise system, and alerts you to any risks, benefits or limits to your investment, along with your obligations and fees..
  • Regulations: Consider the type of products or services the business offers and whether you will be subject to any state, federal or local regulations. You should be evaluating how likely it is that you will face potential legal roadblocks in the future. Laws change frequently.
  • Economic trends: Your success depends upon customers buying your products or services. Is your business likely to be significantly impacted if people cut back on their discretionary spending due to employment or inflation concerns?

Other considerations include how well your brand is known. Are you looking to start a well-known burger franchise, or do you want to be the first to open an auto parts store in your town that is relatively unknown in the region? Your risks may be lower, but your upfront and ongoing costs will likely be greater when investing in a nationally, or internationally-known brand.

Make an informed decision

Investing in a franchise helps many Americans reach the goal of owning their own business. But becoming a franchisee of even the most well-known brand doesn’t guarantee success. Much of the heavy lifting for evaluating a franchise opportunity can be done before any paperwork is signed or money changes hands. That is why it is critical to work with an experienced franchise law attorney who knows how to review the documents and protect your interests and your future.