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Franchise Candidates Must Avoid Being Penny Wise and Pound Foolish

by Ed Teixeira

Individuals interested in a franchise opportunity need to invest money in order to obtain the best evaluation of a franchise.

There are a number of variations to the term "Penny Wise and Pound Foolish" but the basic meaning refers to "an individual thrifty with small amounts of money but wasteful with large amounts." Although I wouldn't use the literal meaning when referring to a franchise investment, I use the term as an example of individuals who seek to cut corners when vetting a franchise opportunity.

For many people, purchasing a franchise is one of the most important decisions they will make. They often rely upon their savings, a home equity loan or a loan from a family member as a source of capital. Although franchising has been the right decision for a number of people it has its risks. One of the observations I've made, after spending many years working in the franchise industry is that there are a certain number of prospective franchisees who will try to spend as little as possible evaluating a franchise opportunity and conducting the appropriate due diligence. In some cases, they will avoid using a franchise attorney despite admonitions from franchise organizations, the FTC and even most franchisors. What is astounding is that these same individuals will not hesitate to invest $100,000 or more in a franchise despite this lack of appropriate due diligence.

Not unlike any new business venture, investing in a franchise has its risks. Many of the provisions in today's franchise agreements are the result of previous franchise litigation and specific judicial decisions that require an experienced attorney to provide advice regarding the agreement. In addition, a professional with financial and business experience such as an accountant should review the financial aspects of the franchise agreement as well as the franchisor financial statements. There are also franchise firms that can provide evaluations and comparisons of franchise systems that can provide a comparison among similar franchise opportunities.

The important lesson to be learned is that a small investment for professional franchise advice before signing a franchise agreement and investing capital is the right decision. An unintended consequence of the Internet is that the amount of information available, on a variety of subjects, can create a false sense of confidence. There is a great deal of franchise information on the Internet, including various websites such as the FTC site. It fine to use this information to gain a basic understanding of franchising but don't think your new found knowledge can take the place of a franchise attorney.

Before you sign a franchise agreement, pay a franchise fee and make a financial commitment to a new franchise be sure that you utilize franchise professionals to guide you. It's an investment you need to make.

2015 FranchiseKnowHow, LLC

Ed Teixeira is the President of FranchiseKnowHow.com and Chief Operating Officer, FranchiseGrade.com. He is a former franchise executive and franchisee. He can be contacted at 631-246-5782 or at  franchiseknowhow@gmail.com

 

 

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