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Apr
6
2021
OWNERSHIP

5 Risk Factors to Consider Before Buying a Franchise

5 Risk Factors to Consider Before Buying a Franchise

Before you buy a franchise, assess the level of risk associated with these 5 factors to determine the potential impact on your business venture.

There are many advantages of buying a franchise rather than building your own business from the ground up. Finding the right small franchise to invest in can provide the added security of a proven business model and built-in brand equity.  However, any business venture involves a certain degree of potential risk. To get a better idea of just how much risk is associated with any franchise opportunity you’re considering, seek the assistance of an experienced professional advisor and keep these top five risk factors in mind.

Fads

Successful and well-known franchisors have usually been in business for several years, but there are certainly some newer franchise brands that are doing very well. Business needs and consumer preferences change over time (and sometimes quickly, as the last year has proven). Established franchise brands that have stood the test of time are skilled at evolving to meet ever-changing customer needs, but new brands haven’t proven their resiliency. Thoroughly investigate every franchise opportunity you’re interested in to assess its longevity and ensure it’s not just a fad at risk of burning out.

Don’t be discouraged from joining a new franchise system with a booming market; just approach it with extreme caution. There are advantages to getting in early or securing a prime location, but there is also more risk involved with new opportunities. Weigh your options and how much you need to invest, and always prepare yourself for the consequences if the trend turns out to be only temporary.

Regionality and Seasonality

Every product has its place and season. You may think opening a franchise in a region where the franchisor is not yet established will give you an advantage, and it very well might, but it depends on the industry and local preferences. A franchisor may not be located in a specific area for a reason and going against the grain may not afford you the success you anticipate. If you choose to establish your franchise in an area where the brand is not as well known, be prepared to take on more advertising and promotional activities since you won’t have that initial brand equity to lean back on. Consider if the franchise’s potential is worth the extra marketing efforts you’ll need upfront.

Seasonality can pose a risk if you’re not prepared for it. Some seasonal businesses do so well in their peak months, that revenue can carry them through the off-season. If this is your plan when you buy a franchise, be prepared to hit the ground running during your busy time and save for when things slow down. You could also consider promoting a secondary product to keep the dollars flowing in to sustain your business even when profits aren’t as high. Another option is to add an additional seasonal business and potentially take advantage of overlapping customer bases.

Whether it’s investing in a small franchise in a new area or buying a franchise that sells seasonal products, planning for down time and ways to keep the cash flowing are key to your success.

Recession Resistance

Some businesses perform better than others in difficult times. Certain products and services will always be needed, regardless of the state of the economy. For example, food, health care and education are necessities and the least likely to be cut by a customer if they are struggling financially. But in tough financial times, discretionary purchases are more likely to be avoided or greatly reduced.

Thus, determining whether the products and services a business provides are essential or optional is a big factor in deciding what franchise to buy. Also review the franchisor’s financial history carefully. Pay special attention to how it faired during past recessions and find out what safeguards, if any, are in place when the economy becomes unstable.

Capital Risk

Any business venture comes with some financial risk. When you buy a franchise, you need to ensure you have enough capital to pay the required startup fees along with training costs, equipment and property. But, before you invest, take a close look at the Franchise Disclosure Document (FDD) of your potential franchisor, focusing on the last few years of financial statements. Have an accountant look it over with you to help spot possible weaknesses in the franchisor’s business, any additional risk that you may not have anticipated and determine whether the franchisor appears to be meeting their growth plans.

Government Regulations

External risk factors like government regulations can be challenging to evaluate but have a significant impact. Every business is at the mercy of government restrictions and it’s often difficult to foresee changes that result from current events. However, emerging industries run a higher risk of being affected by new regulations that could cripple a business overnight. Similar to regional franchises and fads, it tends to be safer to invest in a well-known, experienced brand since these are typically in established industries less susceptible to compliance risk due to changes in laws and regulations.

As with starting any business, when you invest in a small franchise it’s important to remember risk isn’t limited to a single factor. It’s the result of combined pressure from multiple risk factors that can have a negative impact on your investment. Ensure that assessing potential risk is included in your due diligence process to thoroughly evaluate any franchise opportunity before signing on the dotted line.

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We Proudly Support Our Veterans

Participating partners with the VetFran program, The UPS Store offers qualifying veterans $10,000 off their franchise fee to start their new business. To learn more, contact The UPS Store Franchise Development Team.

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Ranked for over 30 Consecutive Years

The UPS Store has been ranked #1 in the postal and business services category for over 30 years and remains in the top 5 overall for the fifth consecutive year according to the Franchise 500 list.

Kristin Howard

Franchisee, Michigan

The reason my husband and I decided to go into franchising and specifically with The UPS Store, is the different opportunities we're given with the business. The UPS Store has name recognition as well as opportunities to expand.

Debbie Adams

Franchisee, Kentucky

What I enjoy most about being a The UPS Store owner is working with my customers. We are the solution specialists for our customers.

Jim George

Franchisee, Illinios

My favorite part about The UPS Store network is the camaraderie with other franchisees. Everybody loves to help everybody else. You’re really part of a family.

Greg Murray

Franchisee, Florida

The interesting thing about The UPS Store is that when a customer walks through the door there's an extremely high probability that they're coming there to do something that is important to them. So at the end of the day, what we do for customers is very important and they are trusting that we are going to do it well.

See the Full Testimonial

Mariana Huberman

Franchisee, Washington, D.C.

One of the things that I love about The UPS Store franchise system is that you're not ever in this by yourself. The franchisees of The UPS Store network are great.

Heidi Morris

Franchisee, Colorado

The thing I enjoy most about being a The UPS Store franchisee is I get to get up, go to work and know that I'm helping other business owners succeed in what they're doing.

Bob Brown

Franchisee, Tennessee

Owning a The UPS Store franchise has changed my life because it's finally given me the opportunity to engage my customers and my staff and be able to take real pride in what I do. As a franchisee, we get faced with solving peoples' problems every day and we do everything we possibly can to try to help.

Marie Jensen

Franchisee, Oregon

My favorite thing about The UPS Store is the variety. I love the variety of customers, I love the variety of services; getting to know the customers, meeting their needs, finding out how we can help them accomplish what they need to accomplish and seeing how happy they are. That makes me ecstatic.

Tad Mollnhauer

Franchisee, Florida

With the products and services that The UPS Store provides we can make a difference in people's lives and that is the best reason for being a The UPS Store owner.

Joy Batchelor

Franchisee, Idaho

What makes being a The UPS Store franchisee worthwhile at the end of the day is the customers. The customers treat us like we're family.

Paul Erchinger

Franchisee, Texas

One nice benefit of owning a The UPS Store franchise for me has been that it gives me the opportunity to be more involved in the community. As I make relationships with others it seems like no matter what the environment is, in one way or another business comes out of that and that's not my objective—it's been a secondary benefit to being involved in the community.

Chris Reminder

Franchisee, Ohio

There are several things that I really enjoy about being a The UPS Store franchisee. First and foremost it allows me to get to know the people in the local community and that is a lot of fun. We get to see people on a regular basis. We get to know their life stories. That's a lot of fun.

Bruce Jones

Franchisee, Kentucky

Since we have joined The UPS Store, our life has changed by just having more time to spend together as a family. We've been very fortunate with the stores that we have and we have a great staff that looks out for our best interest and we look out for theirs.

Lonnie Williams

Franchisee, Oklahoma

What makes The UPS Store so successful is it gives each individual an opportunity to grow with the network and just meet the challenges that are brought to them on a daily basis. Every day gives us a new opportunity to help another person, to help another small business, to answer a question and to solve a problem.

Jeff Graham

Franchisee, Alabama

I love my customers. I love my employees. I love every person, every face that comes into my store. I enjoy every day going into work and I can't see doing anything else for the rest of my life.

Stacie Stigar

Franchisee, Alaska

I think that this franchise is so successful because of all of the resources that are available to us as center owners—we have marketing materials, we have so many different opportunities for help from the home office, and it just really makes for a great franchise.

Don Pollard

Franchisee, New Jersey

I think the thing that makes this franchise successful is a number of things. First of all we have an outstanding system, we have a great product, a great brand, and we're able to attract dynamic people to run these centers and run the business. So I think when you put all that together it really provides for a winning combination.

Mary Ellen Nichols

Franchisee, Tennessee

The thing I love about the franchise is that you have the UPS name backing you but yet you also have the autonomy to make your own decisions to promote.

Laura Griffin

Franchisee, Florida

In the eight short months I've owned my The UPS Store it has really changed my life. I've gone from being an employee of someone else to being an employer of my associates. It's a big responsibility but it's exciting every day.

Sandy Scandrett

Franchisee, Wisconsin

Being a The UPS Store franchisee has improved every aspect of my life. It's very rewarding financially, professionally, and emotionally. I have a large number of regular customers who are really, really appreciative of everything we do.

Kristie Robison

Franchisee, Alabama

I would say owning a The UPS Store location has changed my life to where I have more time and flexibility. In owning your own business you get your store up and running and you get employees that you can trust that are going to help keep your store running. This allows me to attend my two boys' ball games and also travel and do things with them so it has really changed my life for the better.