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What to know before buying a franchise

On Behalf of | Jan 2, 2020 | business law |

Some Georgia entrepreneurs want to start a business but are put off by the time needed to create a new business from the ground up. Because a franchise carries an existing business model and a brand that customers are already familiar with, buying a franchise can be an attractive option. However, franchises may fail just like any other business. Considering how franchises work may be of benefit before buying into a franchise. 

According to Forbes, a common misconception exaggerates how well franchises perform compared to other businesses, claiming that franchises fail just 5% of the time. This is not the case at all. A franchise has roughly the same chance of failing as other kinds of businesses. So a franchisor that asserts that more than 90% of business franchises will still operate after five years is making a false and misleading claim. 

Prospective franchise owners should know what they are getting into. Some franchisors require their franchise owners to spend a certain amount of money on advertising. Also, franchises are required to set up their stores and establishments in certain ways. Creative individuals might bristle at such requirements. Some franchises also need skill sets that not all business owners possess, like going out and making sales pitches to clients. 

Researching a franchise is also critical. Entrepreneurs should know the history of the franchise, such as whether the franchisor had declared bankruptcy at some point or if other parties had ever litigated the franchisor. Some entrepreneurs also want to know how a franchisor trains its franchises and if there are costs involved during giveaway promotions. A Financial Disclosure Document (FDD) can answer these questions. 

Entreupenuer.com describes other challenges to watch out for. Like a normal business, a franchise is subject to government regulation. Specific laws may pertain to your franchise. There is also the local economy to consider. Some franchises work better in some states than others. Even if the franchise works well for a time, entrepreneurs should assess if their operation can handle an economic downturn.