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The Cons of Investing in a New Business Franchise
Posted on November 12, 2010 by My Franchise Law

If you are considering buying a startup franchise, there are a few key areas to remember in order to protect yourself from a bad investment. Though many new franchises can offer favorable terms and additional support, they can also suffer from some standard startup problems. Here’s the rundown:

Risk:  There is a certain level of risk associated in establishing a partnership with a new company, including the fact that there is no proven record of profitability. You may end up with a product or service that does not actually appeal to the general public, or has major competitors already present in the marketplace.

Lack of structure: With a new franchisor, you will both be experiencing the training process for the first time (them as the trainer and you as the trainee). This might mean that you both will have to work out the kinks in the system together, and you are more likely to face some bumps in the road on the way to success. In addition, the franchisor will be new to the role of offering support and advice, so you both will have to discover the best way to interact to ensure a successful partnership.

Problems obtaining financing: Deciding to back a franchise investment with no existing track record may make it more difficult to secure financing. Lenders will want to determine if your investment and business model are likely to succeed, and they may decide that the new venture is too great a risk.

Unknown brand: A new franchise will not have the same brand recognition as an established business, and an intense marketing strategy might be necessary to make it stand out in the market. It can take years of marketing your franchise to establish a brand in the public eye, and revenues may suffer if consumers aren’t familiar with your franchise business.

External Resources

Small Business Administration

A government resource for finding information on planning, mentoring, and strategies for franchises and small businesses.
SBA Small Business Planner

USA.gov Business Gateway

Resources for every step in planning your business or non-profit, from getting your EIN to handling wages.  
USA.gov Business Gateway

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