The Top 5 Risk Factors to Consider When Evaluating Franchise Opportunities

 

Starting any business involves a certain element of risk. Franchising opportunities are no different. While franchising represents a solid and proven business model that is used widely and successfully by many, it’s important to assess the potential risk in any business venture. With that exercise in mind, here are the top five risk factors you should consider when evaluating franchise opportunities.

Remember that an experienced franchise advisor from Franchise Guardian can help you with risk assessments and a host of other investigative and planning steps before choosing the right franchise. Contact us when you have questions or need more help.

Capital Risks

Unless you are entering into franchise opportunities with plenty of cash on hand, financial risks are always a factor. How much is required up front in terms fees, equipment, training, property, and startup capital must be taken into account. In addition, you should closely examine the Franchise Disclosure Document (FDD) of the potential franchisor, especially the last few years of financial statements.

The last thing you want to happen to your investment is the bottom to fall out because the franchisor doesn’t have the resources to meet its growth plans. We advise procuring a Dun & Bradstreet credit report on the franchisor and any affiliated companies. This can give you a complete financial picture of the parent company’s solvency or lack thereof.

Government Regulations

Government regulations pose a threat to any business. One can never guess what actions can grow out of our changing and often turbulent political landscape, but we can watch for signs on the horizon. While most laws and oversight regulations stem from a desire to treat everyone fairly, preserve resources, protect the environment, or some other noble sentiment, the finished product rarely ever resembles the high ideals at the beginning.

An example could be the recent ripples through the franchising industry concerning the National Labor Relations Board’s investigation into the nature of franchisor-franchisee relationships, specifically at the nature and effects of “no-poaching” clauses. No-poaching clauses are where franchisors require franchisees to not hire employees from other franchisees of the same franchise brand.

Many franchise parent companies have begun to exclude these clauses from their new and existing agreements in an effort to get ahead of the curve and make the change before it is mandated. At issue is how the clauses hold down wages in areas where multiple franchises of the same brand are in operation.

Fad Franchise Opportunities

We did not say “bad” opportunities, but chances are if it’s brand new, you should proceed with extreme caution. Established brands with years of success and an established market will likely be around in the future. “New” often means “higher risk,” so if you’re assessing the risk of possible franchise opportunities, any new company, product, or service should be evaluated carefully.

Consider two examples. Meal-preparation franchises promised to answer the age-old question of, “What’s for dinner?” And yet, many failed miserably. But, when junk removal franchises came on the scene, many said no one would pay for others to haul off trash. And now those companies are among some of the most solid new franchise opportunities available.

Regional and Seasonal Concerns

Another risk that can be easily overlooked when evaluating franchise opportunities is the regional and/or seasonal aspects that can affect a company’s viability. A snow blowing and removal service that may boom in Chicago would fizzle in Miami. Likewise, lawn care franchises could thrive almost year-round in south Florida, but would not be viable in northern climes without a secondary service (like snow removal).

Regions also have differing customs and tastes that can sometimes come into play. Travel across the United States and sample all the versions of barbeque. Texas, Tennessee, and North Carolina all boast to produce world-class barbeque, and yet all are vastly different. Opening a Texas barbeque restaurant franchise in North Carolina could work, or it could be a huge bust.

Recession Resistance

Another element of risk is how well the business will hold up under different economic circumstances. Some businesses enjoy better success only in thriving economic times, while others seem to be built to weather the storms. Consider what consumer products or services are considered vital, even in hard times. Those franchise opportunities will do well even when consumers are pressed and have less discretionary income to spend.

Recession-resistant franchise opportunities provide goods and services that the majority of consumers cannot do without, even when forced to tighten their belts. For example, someone may choose to paint his or her own house or clean their own carpets in hard economic times instead of hiring a franchise contractor. Likewise, a consumer may be more likely to repair his or her car during a recession, but in a better economy, he or she would just purchase a new one.

Do you need professional assistance with evaluating franchise opportunities? An advisor from Franchise Guardian can answer your questions and work with you to research and vet any franchise option. Contact us online to arrange a consultation.

Franchising

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