Entrepreneur Mag has an article on the top franchisee mistakes.
- Lease terms.
- Construction and fixture costs.
- Business equipment
- Inventory and supplies.
- Marketing costs.
- Labor costs.
I vote for construction costs and labor costs as the biggest mistakes – that’s is where most of the surprises and mishaps occur.
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Ryan is an attorney and valuation specialist residing in Chicago. He chronicles his thoughts and research on FranchisePundit.com. You may reach him by email ryanknoll@gmail.com or mobile telephone 312-715-8115.
I vote for the marketing budget mistake – but in my view the mistake is believing that the franchisor has a well worked out opening day without demanding evidence.
I vote for the Lease Terms mistake – the contingent liability of the lease can far outweigh the initial investment. If the location is marginal, the lease terms may prove to be the most costly mistake.
Followup to Jim Coen’s comment:
I agree, and the article does not even discuss the Personal Guaranty and how to limit liability (good-guy clauses etc). I have seen cases where the Guaranty remained personally liable even for extensions and renewals; in theory you could be liable forever, even after you sell the business.
Also, insist on a mutual Estoppel Letter clause. When you sell your business, the buyer will want written assurance that they don’t end up with a bill for “back rent” which the landlord just “discovered.” (I’ve seen it happen)
An oddity which sometimes appears in my area is the Landlord asserting a UCC interest as additional security for performance under the lease. These are bad, bad clauses–for several reasons. However if you can’t get the clause removed, at least insist that a provision be inserted into the lease subordinating it to any purchase-money and business revolving credit loans of yourself or a subsequent purchaser. Otherwise, the Landlord may refuse to subordinate when you try and sell– usually this is just a tactic to get greased, but it can be expensive.
Best thing is to use a good real estate broker familiar with retail leasing in your area, and an attorney who knows something about retail and small businesses.
Upon reflection, I agree with Jim and Paul. A poor lease can cripple a franchisee’s early exit plans.
I vote Lease and Labor.