Don’t Lose Your Money! 10 Big Franchise Purchasing Mistakes To Avoid
You want to purchase a franchise, but you don’t want to lose your money in the process.
If I’m describing you, this is a must-read article.
10 Franchise Purchasing Mistakes You Need To Avoid
I’ve spent over 23 years helping people navigate franchise research and franchise business purchases. And I’ve seen the same costly mistakes pop up again and again.
And interestingly enough, most of them could have been avoided.
Unfortunately, a lot of today’s franchise purchasers get their information from biased resources. And they don’t take the time needed to vet them.
That said, let’s dig in, so you can learn what the mistakes are-and avoid them!
1. Rushing Into the Decision
Excited by glossy brochures and impressive profit projections, some people sign their franchise agreements too fast. Within 3–4 weeks of their first contact with headquarters. Don’t do that.
What You Should Do Instead:
- Take at least 3–4 months to investigate any franchise opportunity
- Read the entire Franchise Disclosure Document (FDD) twice
- Make a list of at questions to ask franchisors
- Visit multiple franchise locations in person
- Create a detailed business plan
2. Not Calling Existing Franchisees
The best intelligence comes from people already in the trenches. Franchisees. Period.
And if you ask your questions the right way, they’ll tell you everything!
Essential Questions to Ask Franchisees:
- “What’s your actual monthly revenue compared to projections?”
- “How long did it take to break even?”
- “What’s your relationship like with the franchisor?”
- “What unexpected costs have you encountered?”
- “How effective is the training and support?”
- You’ll find dozens more questions to ask franchise owners here
3. Underestimating Initial/Ongoing Capital Requirements
The franchise fee is just the beginning — like an iceberg, 90% of costs lie below the surface.
Real Cost Breakdown Example:
- Franchise Fee: $45,000
- Build-out Costs: $150,000
- Equipment: $100,000
- Initial Inventory: $30,000
- Working Capital (12 months): $100,000
- Marketing: $25,000
- Personal Living Expenses: $6,000 monthly
4. Falling for High-Pressure Sales Tactics
“This territory probably won’t be available next week” is often a red flag.
There’s more.
Common Sales Pressure Points to Watch For:
- Limited time offers that keep getting extended
- Promises of exclusive territories that aren’t really exclusive
- Pressure to sign before completing due diligence
5. Skipping A Review of Your Documents By a Franchise Attorney
Believe it or not, I’ve talked to more than a few people who didn’t work with a franchise lawyer. Huge mistake. Why?
Because a franchise agreement is a complex 200+ page legal document that will govern your business for years. And it’s heavily tilted towards the franchisor.
What a Good Franchise Attorney Will Review:
- Territory rights and restrictions
- Renewal terms and conditions
- Transfer/resale rights
- Termination clauses
- Personal guarantee requirements
6. Not Understanding the Territory Rights
I worked with a client who thought he was sold a protected territory. Turns out it wasn’t protected at all. How do I know?
He called me to tell me that an aggressive franchisee was selling in his area. We were both surprised and both pissed.
Territory Questions to Ask:
- What’s the exact territory boundary?
- Are there carve-outs for certain locations?
- How are online sales handled?
- What protection do you have from other franchisees?
- Can the franchisor sell through other channels in your territory?
7. Ignoring Your Skill Set
Being a great chef doesn’t mean you’ll run a successful restaurant franchise.
In other words, owning a food franchise requires serious management and operational skills. The food part isn’t that important if you can’t run a smooth, profitable operation.
So, determine if your skills match what’s needed for a specific franchise opportunity.
Skills Assessment Checklist:
- Management experience
- Sales and marketing abilities
- Financial management skills
- Customer service experience
- Industry-specific knowledge
8. Poor Location Selection
Location can determine 80% of your success in retail/food franchising.
So, work with your franchisor and their real estate department closely.
Location Analysis Must-Haves:
- Traffic patterns and counts
- Demographics analysis
- Competition mapping
- Parking availability
- Lease terms and conditions
- Future development plans
9. Not Having an Exit Strategy
Plan your exit before you enter.
What do you want to do when your 10 year Franchise Agreement ends?
Sell your franchise business? Keep it?
Get your family involved…as in creating a legacy business?
Exit Strategy Considerations:
- Franchise agreement transfer terms
- Required franchisor approvals
- Training requirements for new owners
- Transfer fees
- Right of first refusal clauses
10. Believing Revenue Projections Without Verification
This one is huge. And it’s one where franchise salespeople and franchise consultants can paint rosy pictures.
Additionally, the Franchise Disclosure Document (FDD) may state franchisee earnings and/or revenue numbers. But they’re generally averages.
That’s why you need to verify those numbers when you call and visit franchisees.
Financial Verification Steps:
- Get actual numbers from existing franchisees
- Create worst-case scenario projections
- Calculate break-even point
- Verify all startup costs
- Include personal salary needs
Frequently Asked Questions
How much money do I really need?
The upfront investment, monthly operating expenses and more. And don’t forget to include at least 12 months of personal expenses in your calculations.
How long until I’m profitable?
Most franchises take 12–24 months to reach profitability. Some may take longer depending on the business model and market conditions.
Should I buy a new franchise or an existing one?
Existing franchises provide immediate cash flow but may need updating. New franchises offer clean slates but require more time to build customer base.
What’s the best franchise to buy?
The best franchise matches your skills, budget, and lifestyle goals. Consider factors like hours of operation, employee count, and hands-on requirements.
How do I validate franchise earnings claims?
Talk to existing franchisees, review Item 19 in the FDD, and create your own financial projections based on actual franchisee experiences.
What are the most important parts of the FDD?
Focus on Items 3 (litigation), 7 (estimated initial investment), 19 (financial performance representations-maybe), and 20 (the list of franchise outlets-and franchisee phone numbers etc.)
For more information on all things franchise, visit the longest-running, most informative blog in franchising, The Franchise King Blog.
