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3 Mistakes That Will Bankrupt Your Franchise

Published on December 20, 2013

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As a business owner you will make many mistakes. This is to be expected. If you are not making mistakes, learning, and moving forward; you are doing something wrong. Part of owning and building a successful business is trying things. Sometimes the things you will try fail. Buying a franchise is no exception. Even though you are buying a “proven business model”, there are still going to be many decisions that you will need to make on a daily basis that no system, no matter how fine-tuned, can adequately account for. Some will work. Some won’t. This is ok.

So long as you don’t make the following mistakes:

* Incomplete Background Check: Take your time. Most franchise buyers do not take enough time to look into the history of a franchise before purchasing. Skimming through the franchise documents and talking to the franchisor is insufficient. Don’t let blind faith and the excitement of the opportunity short-circuit your due diligence.  A great place to find current and former franchisees for your franchise is in the Franchise Disclosure Document, Item #20.  The franchisor is required to provide this information.  Speaking to current and former franchisees is vital to your background check.  I recently interviewed a former franchisee on my podcast, Franchise Euphoria, who said that she interviewed 50 franchisees before her purchase.  It is never too much! You will find out so much information, and probably enjoy meeting new people who can become great resources for you if you go through with the purchase.

* Poor Understanding of Business Model: It is not enough to merely understand the product or service you are selling. You must understand the business model. To do this, you must understand how many widgets or services you need to sell to break even. You must understand the hard costs of your franchise, the royalties, the number of employees you will need, how to hire them, who will manage them, and on and on and on. A lot of work goes into this. It should. You are buying a business. This is not something you do on a whim.  There is simply no excuse for not understanding the business model of the franchise you are interested in purchasing.

* Undercapitalized: Not having enough money or the ability to get enough money in a crunch, will bankrupt your business.  You must have a nest egg or someway to get money should you need it. And in all likelihood, you will need it at some point.  Plan for this.  Your costs will likely be 4-5 times higher than expected. You need to have extra cash to get your business through the tough times. Your goal should be to have enough in reserves to operate the business for 6 months without any revenues coming in.

Though this is not an exhaustive list of mistakes to avoid, it does highlight a few of the most important ones to avoid.  You can easily do so with planning, organization, and strategy.

What are you doing to avoid these mistakes?


Josh Brown
Josh is a franchise attorney, lifestyle entrepreneur and podcaster that is passionate about helping Starters start right.  That means You!  My mission is to help people make smart purchases and otherwise find success in franchising!

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