No franchise, regardless of what industry it belongs to or how successful it becomes, is immune to risk. However, there is one key way to protect a franchise business from risks: by purchasing an insurance policy. Before discussing the most common risks that a franchise owner face, however, it’s important to understand what is considered a “franchise.”
What Is A Franchise?
A franchise is a for-profit organization owned by someone who licenses this business’s operations and products or services to other parties in exchange for a fixed fee. Most franchise owners have as their main objective to gain greater market share or have locations across multiple areas around the country. According to Smallbizgenius, there are over 750,000 franchises in the United States and these employ more than 8 million workers.
Top Risks to Protect Yourself From As A Franchise Owner
Here are the top five risks that you should protect yourself from if you own a franchise:
Fads
Consumer tastes and business priorities often change every few years, and this has definitely been true even amid the ongoing COVID-19 pandemic. Therefore, be sure to always perform extensive research on every franchise opportunity you pursue in order to evaluate whether it can viably last a long time.
This doesn’t mean you should immediately rule out an industry that already has many well-established franchises, like the restaurant industry. If your business sells a unique product or service, you have the potential to edge out the competition.
Recession Resistance
Economic recessions are inevitable and typically hurt most businesses, even highly financially successful ones. They frequently occur every ten years or so and follow periods of substantial growth.
If your franchise is not in an industry that sells a vital product or service, such as health care, food, and non-luxury clothing, your business likely won’t fare well during such periods. Therefore, be sure to develop a strategy for combating recessions, which are often marked by high unemployment.
Government Regulations
The reality is that relatively newer industries are generally more likely to be subject to federal regulations. Businesses that fail to comply with regulations typically incur fines, revoked licenses, and other penalties.
Franchise laws vary by state but all such businesses are required to follow what is known as the Federal Franchise Rule and regulations instituted by the Federal Trade Commission (FTC). One of these requirements dictates that all franchisors need to give prospective franchisees a franchise disclosure document at least 14 days before reaching any type of agreement.
Capital Risk
Capital is one of the many costs that is required to jumpstart any business, as this will help you finance things such as equipment and employee training. It may also be helpful to speak to a business consultant to determine how much you should spend on startup fees given your overall financial situation and the plan for your franchise.
According to the Franchise Business Review, a market research firm, examples of franchises with relatively low startup costs (less than $15,000 on average) include Dream Vacations, TSS Photography, and Cruise Planners.
Seasonality & Regionality
Some franchises, like wedding-planning businesses, perform more strongly during certain seasons like the summer and fall. Additionally, it may be more challenging for you to become successful in a geographical region where consumer preferences don’t align with your franchise’s primary offerings. As mentioned, be sure to investigate as much as possible about your industry and area so that you can make better decisions based on this data.
A franchise can be a highly exciting endeavor, but it’s imperative to understand all of these risks.
Speak To The Franchise Insurance Experts
Reach out to the professionals at John M. Glover Insurance Agency to learn more about the top risks that franchises face. Since 1916, we’ve been committed to servicing the insurance needs of clients throughout Connecticut, New Jersey, New York, Hawaii, and Massachusetts. As an independent agency, we work closely with many well-known, reliable insurance firms.
If you own any type of franchise, (restaurant, hospitality business, movie theater, etc.) you can benefit significantly from purchasing franchise insurance. At JMG, we understand the risks that come with starting a franchise, as well as the penalties franchise owners can face for failing to comply with regulations.
Violations of labor laws, franchise agreements, and damage to property can all have severe consequences. Our policies include coverages such as general liability, business interruption, equipment breakdown, commercial auto liability, property insurance, and workers’ compensation.
Call JMG today or visit us online for more information about our franchise insurance policies.