djbaxter

Administrator
8 Warning Signs You Shouldn't Buy a Franchise
By Bruce Hakutizwi, AllBusiness.com
March 30, 2018

There’s no doubt that buying into the right franchise at the right time can be a fantastic business opportunity for numerous reasons:
  • Proven, duplicatable systems make startup and growth easy and scalable
  • Established branding and national marketing support enhance your own marketing efforts
  • Support from a parent company and community of fellow franchisees
However, it would be naive to assume that every franchise is a potential good buy. Just like any other aspect of business, “consumer beware” holds true in the search for a valid and promising franchise opportunity. Sad to say, there are companies peddling franchise opportunities with no goals beyond collecting upfront franchise fees and moving on. And then even more common, there are franchisors that really want to help their franchisees succeed, but are struggling to support their franchisees effectively.

The following are eight warning signs that can help you identify a franchise you shouldn’t buy.

1. A high-pressure sales pitch. Worthy franchises that have proven track records of success also have reputations to uphold.... If the franchisor’s representative seems desperate to get you to sign, pressures you to make a quick decision, or keeps throwing discounts in to “sweeten the deal,” politely take your leave.

2. Inadequate, incomplete, or missing paperwork. The ... sale of franchises is highly regulated on both the federal and the state level. There are important documents that a potential franchisee should receive, including a Franchise Disclosure Document (FDD). If any vital documents are missing, unprofessional in appearance or content, or intentionally vague in how they’re worded, there’s a very good chance the franchisor is hiding something or hoping to find buyers who won’t know there’s a problem.

3. Salespeople and paperwork that don’t sync up. If the salesman and the documentation are telling two different stories, that's a serious red flag. Legally speaking, you’re going to be bound by what’s on paper.

4. A checkered past. Basic Google searches should tell you what kind of reputation a franchise company has.... no company is perfect and you’re bound to find the occasional negative review no matter how trustworthy a company is, but if you’re seeing a troubling trend, pay attention.

5. An age-franchisee imbalance. Generally speaking, the older and more established a franchisor is, the more franchisees you should expect to be on board and succeeding. If those two metrics are highly unbalanced — in either direction — there’s likely something wrong.

6. High franchisee turnover. Item 20 of the FDD reports how many franchisees have left a franchise system within the last three years.... a high turnover rate in relation to the total number of franchisees.... is a sign the opportunity may not be viable or the systems being duplicated aren’t working anymore.

7. An inadequate training program. A solid franchise training program should allow someone who’s never worked in an industry and never owned a business to get up to speed and succeed quickly enough to ensure profitability within a reasonable period of time. If anything about the proposed training program appears to be inadequate, too short and hurried, or too long and drawn out, you’ll definitely want to talk to existing successful franchisees who have already been through the program.

8. Tinkering and experimentation in the business model. One of the key benefits of buying into an established franchise (as opposed to starting your own business from scratch) is the fact that the business model, processes, and other aspects of business operations are (supposed to be) tried-and-true, time-tested methods that have been proven successful. If a franchisor prides itself on constantly changing methodology, or if current franchisees are having a difficult time keeping up with how many “strategic pivots” the parent company makes each year, that key benefit is gone. Apparently, the “proven, duplicatable system” doesn’t work.

Read more...
 

Bolton

Member
Franchises can mostly be a safe investment but there are just so many better opportunities out there, especially with online marketing, that have a higher ROI and a much lower overall investment....
 

Julia Sta Romana

Top Contributor
8 Warning Signs You Shouldn't Buy a Franchise
By Bruce Hakutizwi, AllBusiness.com
March 30, 2018



Read more...
Thank you for this. I have been looking into franchises. May I ask you advice on something related to this?

I've also been looking into franchises that are relatively new. The main business is established (over 10 years) but they only started franchising. I got interested in them because they're relatively cheaper and it's a good opportunity to be one of the first to introduce a unique business in a different location. What else should I watch out for, in addition to the 8 warning signs?
 
Franchises in the U.S. are highly regulated. For example, many states require success initially in the form of demonstrated sales and revenue documented in a “Franchise Disclosure Document” controlled by the Federal Trade Commission:

Franchise disclosure document - Wikipedia

Franchising is a complex and difficult type of enterprise with far reaching consequences to the brand name if a given local owner does not measure up or perform. Most franchise agreements dictate suppliers and weigh in heavily in the physical location and presentation of the business. They also take a healthy cut off the margins of the franchisee. Many require a quota in sales or they enforce a cancellation clause. The legality of franchises varies with the states in which they are located and individuals who purchase franchises often expect, or are unwilling to pay for the quality of support they need to succeed.

"Buyer beware" I suggest talking to some existing happy operators before a purchase. If the franchiser cannot supply those contacts, beware.
 

Edvin

MVP
Franchises can mostly be a safe investment ...
Not sure if I agree with this. I have yet to find any evidence that suggests the probability of success for franchisee is better than a DIY business owner. However, franchise does provide existing process/model/support that makes it easier to start a business.

...Buyer beware...
Agreed. I wanted to share my franchise research strategy, which I have sprinkled throughout this forum.

1) Browse several competing franchisers by looking at Franchise Disclosure Document (FDD).
I like to first review FDDexchange.com because it is
  • It is free to browse online
  • I don't have to go through formal process to look at their FDD
  • Franchisers remove sections based on new legislation (e.g. financial report for Item 19). SO, looking at past FDD is informative with regards how they do
  • Look at open/close rates
  • Many provide existing franchise owner name/email/phone/address that you can contact
2) I look at the ugly face of the franchise by searching www.unhappyfranchisee.com.

3) Talk to franchise director to get more insights about the market

4) Contact existing franchisees to learn about what works & doesn't work for them

5) Look at good franchisee locations via google maps as well as respective demographics so I have a better understanding how I compare to them

6) Figure out how much I will spend annually for franchise based on single location projection.
Conduct my version of cost/benefit analysis to see if I have the energy and if I should consider hiring a consultant to educate me and help me establish similar process and avoid paying royalties.

7) Analyze assigned territory constraints to identify
  • How many locations I can grow to,
  • How realistic is the logistical management (i.e. travel) to multiple locations
  • How is the demographics & competition for the territory
8) I google the franchise; sometimes, I come across different forums that I find informative

9) Review franchise website and social presence; this doubles as part of my my competitive intelligence research

BTW.
Many franchisers have non-compete clause that prevent you from starting your own business in the same industry or contact clients after you leave the franchise (at-least for a few years or geographic region). This is to prevent you from competing against their business.
 
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A franchise can be a good business in the long run provided that you have to check its standing. In my case, I always go over if paperwork and documents are complete and accurate in case of purchase.
 
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