Top 3 mistakes people make when buying a franchise

Every franchise opportunity is unique, but BDO expert Matthew Allington says there are some common mistakes potential buyers make when weighing up whether to invest.

The decision to buy a franchise is a big one. With so many variables to consider and large investments on the line, there is usually a steep learning curve that accompanies the investment process. Every franchise opportunity is unique, but there are some common mistakes we see new franchisees make when weighing up the viability of a new franchise.

1. Not knowing what information the franchisor must disclose

You need to gather as much information as possible from a wide range of sources to know that you’re making the right decision. The Franchise Code of Conduct requires franchisors to maintain a disclosure document which must be provided to any person proposing to enter, renew or extend a franchise agreement.

You need to gather as much information as possible to know that you’re making the right decision.

The purpose of a disclosure document is to give a prospective franchisee key information about the franchise system, and an existing franchisee current information about the running of the franchise. Avoid a common mistake of relying solely on the prospectus and franchise agreement. It is important to review the information statement, prospectus, disclosure document and the franchise agreement during the due diligence phase and seek proper advice.

2. Getting emotionally attached and not contacting current franchisees

It’s easy to get distracted by persuasive brand marketing, impressive fit outs and even personal tastes when assessing a franchise opportunity. Getting emotionally attached to the business without proper financial due diligence can be extremely risky.

Our experience is that most franchisors and franchisees in a good group are proud of the business they work for and will be open with sharing information. It is strongly recommended to reach out to current franchisees and discuss the business. If the franchisor is blocking you from talking to franchisees, it’s normally a big red flag that something is wrong.

3. Not asking tough questions

You also can’t be afraid to ask the tough questions or be discouraged if you don’t think you’re getting a clear answer. You’re making a big decision (and investment) and you shouldn’t be afraid that someone will be offended if you ask some challenging questions.

Matthew Allington is Business Services Partner and franchising expert at BDO in Brisbane.