Steps to Manage Risk

Now for the practical part: though you can’t eliminate risk entirely, and some fear is normal, you can still make some smart choices to manage your risk.

Be Honest With Yourself

Start with an honest assessment of your goals, abilities, and resources. If you know what you really want to accomplish (a more fulfilling day job? money to buy a second home? better work-life balance?), you have a better chance of finding a franchise that fits your goals. And the more your franchise fits your goals, the more motivated you’ll be to get up each morning and do the work necessary to make your business successful.

You should also be honest with yourself about your abilities and resources. Franchises vary in the level of business experience and the financial investment required to launch and operate them. By honestly assessing your experience and resources, you can increase your chance of matching with a franchise you can operate successfully. Don’t be afraid to stretch yourself a bit–after all, part of the joy of franchising is the learning experience–but don’t get in over your head. If you have no idea what to do or you run out of money, you’re sunk.

Do Your Homework

You should also make an honest assessment of the franchises you’re considering. Don’t get sucked in by fancy marketing, shiny branding, or claims of “hockey-stick” growth. If your priority is to manage risk, dig deep into the franchisor’s financials, take advantage of every opportunity to network with franchisees, and keep a weather eye out for red flags. Established franchisors that thoroughly support their franchisees and have a record of steady, incremental growth will be the safest bet.

Choose Your Funding Carefully

To reduce your risk, reduce your debt. I know that businesspeople often think of debt as a low-risk strategy: after all, you’re using someone else’s money to make your investment. That money has to be paid back, though–you’re signing away some portion of your future revenue to the lender. If your franchise takes longer than expected to reach profitability, or hits a slowdown, that obligation can prove problematic. The less debt you carry, the more of your revenue belongs to you. You essentially gain margin in your business and reduce the overhead you have to maintain in case of a slowdown.

Have a Backup Plan

Cash is also important as a cushion for your business. If you want to reduce your risk, you should plan to maintain a rainy-day fund for your franchise. You can draw on this to help pay operational expenses during downturns, or you can use it to cover unexpected expenses, such as disaster recovery. Ultimately, aim for a rainy-day fund of 6-12 months’ operating expenses. You probably won’t be able to set that aside right away, but do what you can and then add to it as your franchise becomes profitable.

Ultimately, I give my clients one iron-clad rule when it comes to franchise risk: don’t invest what you can’t afford to lose. The risk of total loss is very low, but don’t put yourself–or your family–in a position where a failed franchise will leave you with nothing. For instance, many franchisees fund their startup costs by leveraging their retirement savings or home equity. I can think of reasons in favor of either option, but I generally wouldn’t recommend doing both.