Common mistakes franchise buyers make

Just saw a helpful list of 10 common mistakes that franchise buyers make. In my experience of selling franchises, it boils down to three mistakes that really stand out.

In the business world, we have learned to make decisions from the best information available and to make it quickly. Too much analysis makes critical decisions so untimely that we miss the opportunity. Although we may not like the lack of objectivity or detail in our due diligence but managers are trained to go with it.

Buying a franchise is a big choice and there are predators out there that want to eat you and your money. A good network of informers can really make the difference between survival and failure.

Here is my list of three common mistakes and how having other fish around can help. First, most franchise buyers that I have met did not have a good grasp of the details of a franchise because they (1) hadn't contacted many franchisees. The challenge is to get real information, not just franchises that the development manager pointed to who espoused corporate propaganda. The franchisor of a friend of mine failed to tell him that three franchisees had failed in his territory, and the contacts that the franchise salesman gave didn't know or weren't compensated for telling him. This is where a network of franchisee's who are in-the-know can really help. Alas, finding such people is quite difficult (being a member of a franchise buying and ownership club -- er, like here -- could make things much easier.)

(2) Not recognizing adequate financing by not developing a true and accurate financial statement. Obviously, real and pertinent information has to be shared by a proper network first. Bad info in from sales people and their appointees can mean bad results going out. Besides all pre-opening costs and enough operating cash, a general rule of thumb is that you should tack on enough working capital to be able to pay your own family expenses for 18 months to 2 years. Take into consideration the scenario that the business won't make enough for you to be paid for sometime; and yet you have to live. Your family still will need to burn cash.

(3) Not reading and marking the disclosure documents to assertively ask questions of the franchise network's executives, staff and franchisees. Most franchisees are razzle-dazzled by the PowerPoint presentation on strategy, trends and training on Discovery Day. They have to be "approved" by the executives so they take the day something like job interviewing in the old corporate days. This is your money. You should ask, ask, ask lots of questions and then review the answers that the corporate head office gave you. Ask yourself, does this ring true? Is this reasonable?

Your contacts and friends that are knowlegable of the industry can help and you can continue to ask questions. If the head office doesn't like so many questions and tries to hard ball you into making the decision now or the offer will be retracted -- well, take it as a sign of bad things to come. Just remember -- both your heart and mind have to be satisfied.