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Beware of oversaturation in the market before you invest in a franchise

On Behalf of | Sep 6, 2023 | Franchise Law

Are you thinking about investing in a franchise? Before you sink any of your hard-earned money into an enterprise, no matter how profitable it may seem to be overall, you need to perform a certain amount of due diligence to make sure that you fully understand the risks.

One of the “red flags” that should make you cautious is a sign of oversaturation or “franchise cannibalization.”

What is franchise cannibalization?

Franchise cannibalization occurs when franchisors allow too many franchisees to operate within a certain limited geographic range, or themselves compete in the geographic area, when there isn’t any likelihood of increasing the overall market.

Some franchise systems permit or encourage too many franchisees to open too close together, without any regard for whether that would saturate their market. It leads to problems including low profitability, and ultimately some franchisees close up shop and lose their investment, and more.

Is there room for growth?

When you’re exploring the options for a franchise, one of the most important considerations is whether there’s any actual potential for growth, especially in changing or unstable market conditions or a volatile economy. You also want to look carefully at how the franchisor approaches the issue. Consider whether you will benefit from a protected territory. How do franchisees benefit from protected territory? (ulmlawfirm.com)

Investing in a franchise can seem like a quick, easy way to get into business for yourself – but you don’t want to rush into anything. A steady, strategic approach to the process, with the advice of experienced legal and accounting professionals, can serve you well.