The Two Biggest Risks of Buying a Franchise Business (and How to Avoid Them)

Reduce risks of buying a franchise business. Learn the two biggest risks and how to avoid them. Mitigate personality and liquidity risks.

Mitigate the Risk and Liquidity of Buying a Franchise

If you are considering buying a franchise, congratulations─ It really could be an exciting and profitable business venture. However, as with any business venture, there are risks of becoming a franchisee. Two, in particular. In this article, you’ll learn what these are and how you can avoid them. The first substantial risk may surprise you.

Risk #1: Choosing a business you’re not suited for

There is no doubt that choosing a business to which you are ill-suited is the biggest risk to your success as a franchisee. Buying a franchise that isn’t matched to your skills is a recipe for disaster. And that’s the same if it’s a franchise that you don’t enjoy on a day-to-day basis.

How can you avoid this risk?

It boils down to knowing yourself, and then making sure the business is right for you – and one of the biggest benefits of buying a franchise is the amount of due diligence you can do compared to starting a business on your own. 

You can call existing franchisees and ask about their experiences. You can ask about the support and training that is provided, what the onboarding process is like, and the first 90 days, first year, and first three years. You can find out how existing franchisees are doing, what their challenges are, and what they enjoy and dislike most about their businesses.

This insight can help you decide if the business is a good fit for you – both from a skills standpoint and a day-to-day operational view.

If your first reaction is, ‘I don’t want to do that,’ then maybe that business isn’t the best fit for you. 

It’s worth putting in the effort in this due diligence – it will help you avoid unnecessary heartache down the line. It’s crucial that you buy a franchise that will help you achieve your personal and professional goals.

Risk #2: Not having enough capital

The second major risk of buying a franchise is a lack of capital. Just as when starting a business from scratch, a lack of working capital can kill you.

Do you have enough money to invest in the business to get it off the ground and see it through the first few months? This is something you need to carefully consider before making any decisions.

It’s crucial to review the requirements provided by the franchisor – which are stipulated by federal regulations. This will detail the minimum finances expected to buy a franchise and itemize them, too. This is a great starting point, but not the whole story.

We recommend that you create a Pro-forma, do your own diligence, and make sure your finances are fit to start and run your new business. Getting real about the finances you need will ensure you have an accurate picture and a starting point that will not stretch your finances.

How can you reduce and mitigate risks when buying a franchise?

Whether starting a business from scratch or buying a franchise with a proven and trusted business model, you’ll need to make certain that it’s the right business for you and that you are prepared financially. Careful consideration is key to your success:

  • Take the time to determine if the business is a good fit for you from a skill set standpoint and a day-to-day standpoint

  • Review the investment requirements and do your own due diligence

Take these two steps, and you will mitigate the two biggest risks to your success as a franchise. Then you’ll really be able to take advantage of the benefits of buying a franchise, such as brand recognition and business support you simply won’t get when starting your own business from scratch.

In short, if you’re thinking of buying a franchise, take the time to do your research and make an informed decision. And here’s where to start:

Take our franchise assessment and discover the type of franchise to which you are most suited.

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