Red Flags to Look for When Choosing a Franchise
Most franchisors that you consider working with will provide exceptional opportunities. They'll be happy to properly train you, offer support, and work in an ethical manner. There are a few franchises, however, that do not have your best interest in mind. If a franchise seems too good to be true, then it just might be. How can you tell a bad franchise from one worth your money? Here are a few red flags to look for when researching franchise business opportunities.
The Details About Support and Training Are Hazy
Receiving training about the business you are entering is one of the top advantages of investing in a franchise. Because of this, you need to ensure prior to making an investment that the training you receive will be comprehensive and structured. The more you prepare for your business' opening, the more of a success it will be.
Franchisors who want you to thrive will be upfront and clear about the amount of training they offer, what their training touches on, how long it will take you to be trained, and more. If you find that a franchisor is being vague about their training, then you may want to consider other franchise opportunities.
You Haven't Been Given Financial Stats
You may think that if a business is able to franchise, then it must be doing well financially. This isn't always the case. Certain franchisors want to avoid sharing their sales history with you, and that should be deemed a red flag. Reputable franchisors should be willing to provide you with essential documentation, and that includes sales figures. Franchisors that keep their previous sales a secret or who won't answer your questions about them aren't to be trusted with your investment.
"Easy Sales" Are Guaranteed
Unfortunately, there is no such thing as a sure sale in the world of business. If you meet with a franchisor who boasts about how simple it will be for you to make sales and gain profits, then you should tread very lightly. While you do get to skip much of the grunt work as a franchisee, there is still plenty of dedication and hard work required. This is the case for all industries — whether you're looking into restaurant franchise opportunities or considering buying into an auto insurance franchise.
You Can't Contact Existing Franchisees
Hearing from people who decided to invest in a franchise is essential for understanding what your experience with that franchise could be like. Speaking to newer and long-time franchisees gives you insight into the pros and cons of a franchise — and there will always be both. These people will either act as a positive reference or as a cautionary tale. If a franchisor is hesitant to give you the contact information of existing franchisees it's because they think you won't like what you hear. You'll most likely want to look elsewhere.
According to Statista, in 2020, the most famous yet most lucrative U.S.-based franchise was McDonald’s, bringing in over $93 billion in sales. Should you think about investing in a larger franchise like this, then you may be able to find franchisee feedback online.
Existing Franchisees Give Negative Feedback
This one is fairly obvious. Most of the time, existing franchisees will be entirely transparent about their experiences. If you reach out to existing franchisees inquiring about their experiences and they tell you to steer clear, then you may want to take their advice. On the flip side, franchisees that have nothing negative whatsoever to say about the business may have something to hide. You might want to proceed with caution. No franchise is without faults.
You Feel Like You're Being Sold To
A franchisor will naturally want to talk their business up to an extent. They want to be sure you know all of the perks of investing. However, you should never feel pressured to sign a franchise agreement or feel rushed in any way. Purchasing a franchise isn't something to be taken lightly or something that happens overnight. You deserve time to think through your options. Pressure at the very beginning of a business relationship is an indicator of what your future with that franchisor could be like.
Additionally, franchisors should want to be selective with their franchisee candidates. The right franchisor has a positive reputation that they want to be careful about preserving. Trustworthy franchisors won't want to speed through the early stages.
The Franchise Agreement Is Short
Franchise agreements can be complicated. While their concept is easy enough to understand, the actual documents tend to be between 25 and 30 pages long. Once addenda and exhibits have been included, they can be double that length. That's because legitimate franchises have a lot of rules, regulations, legal stipulations, and more that they need to include in their agreements. They have a lot of bases to cover. These documents also go into your rights as a franchisee.
A franchise agreement that is fewer than 20 pages is likely too short. A legal document like this should be exceptionally detailed to protect both you and the franchisor. Contact a professional business lawyer if you don't know what a franchise agreement should look like or if you feel like the one you've been presented isn't as comprehensive as it should be.
Your Financial Obligations Aren't Clear
After the franchise agreement has been signed, you will need to pay a series of regular fees. You should know precisely the amount of money you'll need to contribute to these fees. Prospective franchisors should present you with a disclosure document that gives you a firm idea of what your financial obligations are. Franchisors that refuse to offer you a franchise disclosure document probably think that you wouldn't move forward with your investment if you knew every detail. Even when given this document, you should have an experienced lawyer take a look at it so that you know you aren't getting duped.
Steps to Take When Buying a Franchise
It's up to you to diligently investigate your options when it comes to franchise opportunities. Once you've thinned out the list of potential franchises, here are the key steps to take to avoid making a mistake with your investment:
- Interview the franchisor: Ask every question that you have for them. You don't want to wait until after you've signed your franchise agreement to discover that their business practices don't align with your preferences.
- Interview existing franchisees: Reading pre-written testimonials from your franchisor won't be enough to paint a full picture. Speaking to existing franchisees will let you know the good, the bad, and the ugly. You won't be entering your new business relationship blind.
- Have a professional read important documents: Professional attorneys who specialize in business or franchising will know what franchise documents should look like. They may be able to spot red flags that you would have missed while going it alone.
Once you've done your due diligence, then you can feel confident about buying a franchise. At the end of the day, you should always trust your gut instincts if a business appears seedy. To learn about legitimate and worthwhile franchise opportunities, utilize the services offered by Franchise Recovery!
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