How to spot these 4 major red flags before buying a franchise


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We all know that in every industry, there are good, strong, well-managed companies, and then there are some … not so good. This is also true in the franchise world. The challenge can be knowing what to look out for – especially if you're exploring franchise ownership for the first time.

While there are many strong franchisors, it is important to understand, especially for aspiring franchise owners, that there is a lot of work ahead to find the right fit. As a franchise consultant for many years, I have developed a list of several warning signs to keep an eye on when evaluating franchise opportunities.

Here are four red flags to watch out for.

Related: Take these 5 essential steps before signing a franchise agreement

1. Current franchisee comments are negative

Passing through discovery processyou will have the opportunity to speak directly with current franchisees. Without being rude, ask honest and pointed questions. A best practice is to build reports and ask more general questions first, then work down to financial questions at the end. If current franchisees are unhappy with the parent company or don't see the value in their franchise, that's a big red flag.

Ask current franchisees these three questions:

  • Would you do it again?
  • Are you thinking about expansion?
  • How can I fail in this business? (This question enlightens you about the critical skill or trait you need to be successful in that system.)

2. The franchisor's leadership makes you uncomfortable

Trust your gut! During the discovery process, you will have the opportunity to meet with the franchisor's management teams. If you're getting bad vibes from the leadership team or their representatives, listen to your intuition. Think of the franchise structure as a business partnership. You both bring something to the partnership and you will have obligations to the other – so are these people you can partner with? Finding one reliable company it is vital.

I know this may sound somewhat esoteric, but it is important to know the history of this franchisor. Is this their first rodeo? More specifically, do they have a proven track record of franchise success? They may be good at providing their services to clients, but once they franchise, their new business is supporting the franchise owners, which is a different skill set. It is important to look under the hood and see if this franchisor is an independent or if they have other successful companies under their umbrella of operations.

There are franchises out there that pop up quickly and don't have the support needed to earn your trust. Be sure to dig deeper into the franchisor and their management team before you decide to purchase that franchise.

Related: Beware of this type of entrepreneur when franchising

3. A controversial fee structure

It is expected that a franchisor will require an initial fee as well as royalties, but it is important that you understand the fee structure up front. While doing your due diligence, if you notice that a particular franchise has significantly higher fees than comparable franchises, that should make your ears perk up.

Points 5 and 6 of Franchise Disclosure Document (FDD) are the fees you pay to the franchisor. It is important that you take the time to review and compare these items. Understand, not all fees for your franchisor are bad – but you need to understand what you're getting for that fee and how it would compare to how you would do it yourself.

For example, say you take a look and see a line item you're paying the franchisor called a “technology fee.” It's worth your time to consider what this fee actually covers. Often, a franchisor will have the resources to purchase the best technology tools because they are purchasing it on a large scale designed to cover the needs of the entire franchise operation. Compared to what you would spend on a similar lower-tech product on the market, it is much cheaper and more efficient. In this case, that “tech fee” is worth it.

4. The sales process is questionable

A good franchise will be as exciting to you as you are to them. If it feels like franchisors they are selling you a badly used car, this is a bad sign. A good development representative will not only push someone forward – they will evaluate your work history, personality, experience, financial position and expertise. All of these aspects are potential assets to their brand, and they should carefully consider the individuals who will represent that brand. If you're getting cheap sales tactics and feel pressured, that's a red flag.

For example, if you need a new car and are trying to decide between a Toyota Camry and a Honda Accord—both similarly priced cars—but have a terrible experience at one of these dealerships, you probably won't. buy that car.

If a franchisor has a poor sales process, this may be an indicator of larger concerns. You should expect professionalism, getting your questions answered and a sense of transparency. Part of the sales process should also include connecting you with other franchisees in their network.

Related: 4 things I wish I knew before starting my franchise journey

What is called validation, or talking franchisees into a system, is a tried and true part of the sales process that I consider to be one of the most important elements. After all, what better way to learn the good, the bad and the ugly about a brand than by talking to people who already own the brand? If a brand is preventing you from talking to other franchisees in their network, that's a huge red flag. A good franchisor will try to put you in touch with as many franchisees as possible.

After all, it's impossible to predict every possible red flag; however, when you ask the right questions and know some of the telltale signs to look out for, you're ahead of the curve. To avoid these red flags (and others), working with an experienced franchise consultant can be a great safety net.



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