Four Franchise System Red Flags
For someone starting out in franchise ownership, there’s probably nothing more exciting than getting your name on that contract and opening the doors to your new business. However, amidst all the glamour and glad tidings, there may be a few signs telling you this may not be the best opportunity for your important investment. Do you know how to spot a business with potential problems and pitfalls?
You’ll want to research every business very carefully but be particularly cautious when you spot any of the following indications of a franchise with negative issues:
Litigation History
The FDD you will receive from each franchisor you consider joining is supposed to list any history of litigation. As a general rule, a lot of litigation (more than one or two cases per one hundred existing franchisees) is a red flag. You should also look at the issues being contested, because there is a difference between an action instigated by the franchisor against someone who refuses to pay their bills versus an action instigated by a franchisee alleging fraud by the franchisor. Evaluate the litigation history and be sure you feel comfortable about any resolution before moving on with this franchise.
Unit Failures
Another thing that a franchise company is required to disclose to any prospective franchisee is the history of franchisees that have left the system and the reason they left. High turnover of franchisees is often a warning. You’ll need to dig further into the situation because it could mean that the business is not consistently successful at the unit level.
In your research, be sure you differentiate between younger and older franchise systems and also units that close because the owner could not make a go of the business and units that are sold as an exit strategy for the owner.
In a younger franchise system that has only been active for 5-10 years, any significant turnover of franchisees needs to be investigated carefully. In a more mature system, you would expect to see more turnover. If the turnover is the result of the resale of successful units to new franchisees, this is a potentially positive indicator. If the turnover is the result of the termination of franchisees, this is a red flag.
Unhappy Franchisees
Perhaps the most telling indicator for any franchise system you are researching is the answer to the question, “Are the existing franchisees happy?” A plain fact of franchising is that if you find a prevalent opinion among the existing franchisees in any system, you can safely assume that you’ll probably end up feeling the same way if you become a franchisee in that system. If the existing franchisees you call are all pretty happy with their business, with the financial returns and with the value they are receiving from the franchise company, you probably will be too. If, on the other hand, you find that quite a few of them are unhappy, for whatever reason, then this is a real red flag and the safest move for you is obvious - WALK AWAY.
Company Philosophy and Values
A franchise business may be litigation-free, sound and full of happy franchisees but still not be the right business for you. Why? It almost sounds trite, but it is vitally important that you meet and interact with the personnel at the franchise company to find out if, for lack of a better term, these are your “kind of people.” This means that you have determined that what is important to them is the same thing that’s important to you. Are these people with whom you feel comfortable and are you confident that you can work closely with them in the future without conflict? Do their business ethics correspond with yours? If this isn’t a good match, do not buy this business.
As you investigate different franchise opportunities, keep this list in mind. It may save you from investing in a franchise that will not help you reach your financial and lifestyle goals. When you find a franchise opportunity that doesn’t have these red flags, you can be fairly confident that you are making the right choice and have found a great franchise business.
FranChoice helps entrepreneurs realize the dream of owning their own business. FranChoice is a network of experienced franchise consultants who will help you find that perfect fit - matching up your interests, talents, and investment level with a strong franchise business. We provide this valuable service for free. The franchises we work with are pre-screened, high quality franchise companies who we know will be a good place for you. If you need some help finding the perfect fit for you in franchising, get in touch with FranChoice today by clicking here.
