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Warning Signs When Buying a Franchise

Written by: Sebastien Page

Article Overview: 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.

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.

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  Reselling Your Franchise

Article Tags: adequate time, commitments, courtship, due diligence, explanations, franchise agreement, franchise network, franchise opportunity, franchisor, hoops, marriage, payroll, pressure situation, promises, prospective franchisee, prospective franchisees, red flags, salesperson, ufoc, uniform franchise



Related Forum Posts
Re: Enticing Franchises - Top 9 List - All Franchise listed above are in millions of dollars. Do you have the list of Franchise in thousands
Re: Info for would be franchisers... - [quote="Sebastien":1d29sdv1]Like Franchise Times, Franchise Update is a very practical magazine. There is no blah blah, just straight facts that anyone in the franchise community can relate to. I just want to mention that all these magazines are NOT franchisee oriented. I mean these magazines are for franchise professionals. If you're looking to buy a franchise, you won't find much information in there. To answer your question, getting published in Franchise Times was fairly easy. I don't want to brag too much but I think I am known in the franchise industry. I was the marketing guy at Franchise.com for a few years before joining my new company, the World Franchising Network. So people know me and I have a very good relationship with Nancy Weingartner, the Managing Editor at Franchise Times. I was talking with her at the last Franchise Expo South in Miami and she mentioned she'd like me to be profiled. I was like "ok, sure!". I like this franchise executive profile thing in Franchise Times as it is rarely BS. People are usually really natural in there.[/quote:1d29sdv1] Thanks for the follow up Sebastien! And I can't say that I'm surprised that networking with the right people and managing your relationships with them properly are the keys to being published. I guess the old adage holds true of "it's not who you know, but who knows you" that's important.
how much for a franchise fee? - Dear Colleague There is no easy answer to this question. Things to consider: [list=] The sizeof the Franchise Clent base Expected Turnover Intellectual Property costs (recoup) Number of Franchises Number of employees Original Set up costs Franchise admin costs An example: A franchise that I was involved in setting was to a simple "lawn mowing/home repair" franchise. The Franchise included national/local advertising - preparation of client lists - general admin - central accounting etc The Franchise involved 300-500 clients - and an annual turnover of about $300,000 . The annual franchise fee was $30,000. Hope that this gives you some idea Take care Ian[/list]
Napoleon on Project Management - Why do I include this in a list of books aimed at female entrepreneurs? Well...in the expectation that there are as many female history buffs as male ones, and in the belief that anyone interested in history will find this book fascinating, while those interested in project management will learn a thing or two. I think this was the first "gimmick" book - an author using a historical figure (usually a male, military figure, it must be admitted) to talk about modern day business management. I refuse to read any of the kind that advocates - even obliquely - the techniques of the Sopranos or the Mossad - but these military ones are pretty fun. Anyway: Only in the understanding of history, Napoleon might say, do we gain an understanding of strategy in the present. In the same spirit, Napoleon on Project Management offers the recipe for successfully managing your commitments using the strategies, tactics and priorities that propelled Napoleon himself to victory. [The book doesn't gloss over how Napolean eventually fell in defeat, of course, and there's lessons to be learned there as well. TOC Foreword by Douglas James Allan (Napoleanic Society of America) 1. The Rise to Power -The Skills to Succeed -A Compelling Vision -Diplomacy and Networking -Lessons from the Great Campaigns 2. Napoleon's 6 Winning Principles -Introduction -Exactitude -Speed -Flexibility -Simplicity -Character -Moral Force 3. The Downfall -What Went Wrong -Lessons from the Russian Invasion and Waterloo -The Four Critical Warning Signs -Napoleon's Legacy
Re: Franchise Surveys - Another good tool to researching a franchise is to speak with their existing franchisees. This contact information is included in most Franchise Disclosure Documents. In order to get a Franchise Disclosure Document or FDD as it is often referred to, you will have to complete a basic franchise application. The franchisor will then usually provide you with the FDD at that time. Included in that book of information is a list of the existing franchisees, the contract, the investment information etc... This information is required by Federal Law to be disclosed to your prior to making a purchase. So be sure to do your research and start with the Franchise Documents to get the initial information.


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