Warning Signs When Buying a Franchise

Because investing in a franchise is a life-changing event, every prospective franchisee should thoroughly investigate a franchise opportunity before signing any sort of franchise agreement.

While there are multiple websites and books floating around that outline the steps that ought to be taken in the interests of due diligence, you should take a minute to review the “red flags” we’ve outlined below:

1) Is the franchise salesperson putting on the pressure? One of the traits of a good franchisor is that it wants to make sure there is a mutually good fit before “closing the sale.” Should you find yourself being pressured into making a decision but feel like you haven’t been given adequate time to think everything through, don’t sign an agreement. Frankly, the franchisor wouldn’t be hounding you like that if the franchise opportunity were, in fact, spectacular or if there were, in fact, a long line of potential franchisees. What’s more likely in a pressure situation is that the franchise opportunity is not that spectacular, their line is not that long, and, conversely, they need your money in order to make their payroll.

2) Do the salesperson’s explanations not match up with what’s in the UFOC? Is the salesperson making promises and/or commitments above and beyond what’s written in the Uniform Franchise Offering Circular (UFOC)? If so, you should have the contract amended to include those promises. Remember: always get it in writing.

3) Has the franchise salesperson not followed through? Sometimes franchisors lead prospective franchisees through a bunch of hoops so they can better predict how the prospective will respond as franchisees. Just make sure that the franchisor keeps his word during this “courtship” period – if he doesn’t, you’d be wise to not jump into marriage!

4) What do existing and former franchisees have to say? There’s no better way to find out whether a franchisor has lived up to its promises and provided leadership to its franchise network than by conversing with current and former franchisees. Keep in mind that, while there are always those disgruntled franchisees that had unrealistic expectations to begin with, a large number of complaints among a set of franchisees signals a definite red flag.

5) Is there a history of litigation? Litigation is not, by definition, a bad thing – for instance, a good franchisor is willing to litigate in order to protect the brand in question. And there will always be a contingent of disgruntled franchisees that will blame the franchisor for their own shortcomings. However, excessive litigation is certainly a sign of trouble; if this is the case, dig deeper.

6) Are you uncomfortable with the level of training and support provided by the franchisor? Consider the length and composition of the program (all lecture or some hands-on experience?), the subjects to be covered, and the qualifications of the training instructors. If you’re not sure whether or not you’ll learn what you need to know to operate the business, look into the issue. Current franchisees are a good source of information: Did they learn enough via training to operate effectively? Did they get needed help on an on-going basis from a qualified support staff? Are you confident that the support outlined in the agreement can effectively assist you in managing your business?

7) Is the franchisor’s financial stability questionable? You should have a franchisor’s UFOC reviewed by a professional. While most franchisors have the best of intentions when they promise support, what matters is that they are able to ultimately provide the support you need.

One thought on “Warning Signs When Buying a Franchise

  1. An n interesting post you have here ,however I will like to add to it as a successful franchise Attorney :

    1.does the franchise provide and undertake ongoing research and development of its business system and products/service ? this is very important the marketplace is very dynamic and always evolving, a good franchise worth investing in should always improve on its methods and products so as not to be left behind.

    2.fees fees fees.Atimes a franchise may become so costly that what you have to pay takes a big slice of any profit you may make.This also applies to some hidden fess that you may overlook at the begining only to discover that it is contributing to your cost of business.

    3. loss of independence.

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