Buying a franchise? Know the risks

If you’re thinking about buying a franchise, it’s important that you understand whether it’s right for you before making a final decision or signing a franchise agreement.

Just like any business, there are risks when running a franchise. If you buy a franchise business and it goes badly, you could lose all your money and any assets, such as your house, that you have borrowed against.

Franchising is a model for doing business. When you enter into a franchise agreement, the franchisor controls the name, brand and business system you are going to use. The franchisor gives you the right to operate a business in line with its system, usually for a set period of time. It’s important to understand that there will be some things you can and can’t do in a franchise compared to another type of business.

A franchise business can fail, just like any other business, therefore, please consider the following:

Supplier restrictions

Some franchise systems require their franchisees to buy certain products from them or their specified supplier, known as supply restrictions. You might have no choice about where to buy some products.

Price vs. costs

The upfront price of a franchise may seem like a good deal, but there are also costs that you may have to pay to set up and run a franchise. It’s important to understand the total costs you may have to pay.

In Australia, there are laws that must be followed when franchising in Australia, like the Franchise Code of Conduct (the Code) and the Australian Consumer Law. But these laws cannot ensure the success of the business or that your money is always protected.

In the UK there is no authority responsible for enforcing franchising laws and requirements, given that there are no franchise-specific laws.

In the U.S franchising is a heavily regulated industry. On a federal level The Franchise Rule gives prospective purchasers of franchises the material information they need in order to weigh the risks and benefits of such an investment. The Rule requires franchisors to provide all potential franchisees with a disclosure document containing 23 specific items of information about the offered franchise, its officers, and other franchisees.

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