Upfront Costs

• One of the most serious financial issues for any franchise is the upfront costs that entrepreneurs have to pay in order to purchase rights to the franchise and all the business assets necessary to start it, including land, storefront and products. For smaller chains, these costs may only add up to several hundred thousand dollars. For larger, popular franchises, the costs can reach nearly $10 million, much more from hotel chains. This means that many entrepreneurs must strain their finances to the breaking point to even afford a franchise, making it difficult to meet later expense requirements. The parent company faces this risk with every franchise it creates.
  
  

Earnings Claims

• For the entrepreneur, choosing the industry is easy but choosing the franchise is difficult. Most entrepreneurs know what industry they want to start a business in, such as janitorial services, financial markets or fast food. Narrowing it down to a franchise can take much longer, and many parent companies are eager to extol the benefits of their particular franchise. Some are too eager: Earnings claims are often exaggerated or made misleading by choosing reports from the most successful franchises, according to the Federal Trade Commission. This can easily lead to inflated expectations and disappoint -- or short funds -- for the entrepreneur.
  
  

Funds Shortage

• Entrepreneurs are not the only ones who can run into a shortage of funds. Parent companies offering the franchise can also suffer from funding problems. This can make managers difficult to reach and cause the company to pull back on promised support and training, making it very difficult for the franchisee to succeed. In the worst circumstances, the parent company may be considering bankruptcy, which can put the entire franchising relationship in doubt.
  
  

Dependence on Franchisor

• The entrepreneur is often dependent on the parent company not only for funds and support, but for reputation. If the parent company begins to suffer or goes bankrupt, this will create serious problems for the owner of the franchise. While the entrepreneur may be a talented business person, she may find it difficult to start a new project or find financing due to the problems the entire company is having.