Being a franchisee might just be your way to financial freedom. However, like any investment, purchasing a franchise comes with its own set of risks like the competition for a finite market, the demand for the goods or services being sold, the effects of inflation, and the lack of support for their franchisees. The question is, which is the top franchise risk? Read on.
Timothy Bates revealed in a study that in the US, only 62% of franchise businesses survive after four years. But the good news is, once you identify what franchise risk poses a threat to your success, you can act on it. Does that mean it’s possible to make your venture 100% risk-free? No, it only means that you can respond to them accordingly. Chances are the 38% in Bates’ study have fallen victim to these franchise risks.
Franchise Risk: What to be Aware Of
1. There is great competition for a finite market
It’s possible for the market to become oversaturated. In fact, in a perfect economy, this incident would drive prices down. Even in an imperfect economy, this would still have a dent on your potential profits. Before starting your venture, avoid this franchise risk by first observing the market. You would know that the franchise is profitable if most of the companies offering the same product or service are doing well.
2. There is no solid customer base to support the franchise
The reason franchises cost a lot is brand recognition. The less expensive the franchise, the less popular the brand is. So, before you write the company a fat check and take out a loan, make sure you are not exposing yourself to this franchise risk. For sure, the last thing you want is for your investment not to grow, right? It’s quite easy to assess this strength of the brand. Look at the company’s growth compared to others. Also, review how the profits react when new competitors enter the market. If the franchises are hardly affected, then you are guaranteed that they have a solid customer base.
3. The inevitable inflation
One of the real threats to investments of this nature is inflation. No business is immune to its effects. Yes, inflation itself can be controlled, but can never be eliminated. This is something to consider especially if you plan to be a franchisee of a food business. To assess its potential damage to your franchise of choice, observe how the profits move in relation to inflation. Its effects may be negligible for some, but highly taxing to others.
4. The lack of support provided for the franchisees
Even the best franchisors look after their own interests. However, they are wise enough to know how to give substantial support to their franchisees. It only makes sense, right? Each franchise reflects the brand as a whole. In the spirit of symbiosis, highly consider franchisors that give you marketing support as well as training.
5. The willingness of the franchisor to negotiate the terms of substantive provisions
At first, this might seem attractive for potentially would-be franchisees like you. However, ask yourself this question: if the franchisor is confident about the brand and the product, why are they borderline-desperate to reel in franchisees? This is a serious franchise risk as it shows that they have no established market plan. Besides, why do you think the contract of franchise giants such as McDonalds is non-negotiable?
6. The high capital for investment
Aside from franchise fees, there might be other charges that you need to pay such as royalty fees, development fees, and fees for required purchases. Even if you follow the system the franchisor has put in place, your success is not 100% guaranteed. Still, this is considered a franchise risk because putting a substantial amount of money in a venture can mean losing just as much. This is a reason low-investment franchises are highly favored by new entrepreneurs and would-be franchisees with low budget.
7. The company doesn’t have an established track record
The lack of intelligently-designed system placed to improve your sales should be considered a presence of franchise risk. Especially if you are new in franchising, you’d be very likely to commit business errors that would gravely affect your profits. A franchisor worth being shortlisted eliminates the guesswork in running the business. There are some that might have a system, but do you research on how well it works. Do your own research and look at the success rate of other franchisees. If it is indeed effective, there would be only a handful of success stories. Do not judge a franchise by its winners. Judge it by its losers; a good franchise would only have few.
Avoid these common franchising risks and take the necessary action. If you have determined that franchising is for you after you have looked into the advantages and disadvantages, there is a great franchising opportunity in professional car washing and auto detailing. DetailXperts is a low-investment venture with a solid customer base and an established track record. They also provide ample support for its franchisees, because your success is their success.
Seriously looking for a franchise that has less risk? Check out the DetailXPerts’ business opportunity.