8 Warning Signs You Shouldn’t Buy a Franchise
By Bruce Hakutizwi
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.
In either case, sincere entrepreneurs who are looking to invest in a franchise opportunity they can rely on for steady income over the long term will need to identify and avoid bad franchise choices, or they risk wasting time, money, and effort sailing a sinking ship.
The following are eight warning signs that can help you identify a franchise you shouldn’t buy.
Don’t buy a franchise if you notice . . .
1. A high-pressure sales pitch. Worthy franchises that have proven track records of success also have reputations to uphold. When you’re investigating a franchise, you should feel like you’re at a job interview, not a get-rich-quick real estate seminar. 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 law is on your side if you’re buying a franchise; 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. In some cases, the salesperson can be very professional and helpful, and the documentation can seem perfect, but if they’re telling two different stories, it raises a serious red flag. Legally speaking, you’re going to be bound by what’s on paper. Good salespeople who work for bad companies can make a franchise opportunity seem more secure, less expensive, or more lucrative than it actually is.
4. A checkered past. Just by doing some basic Google searches, you should be able to determine what kind of reputation a franchise company has. Is there a long history of legal problems? Are other franchisees complaining about the company? Has the franchisor recently experienced serious financial trouble or some sort of public relations nightmare? It’s important to recognize that 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. A franchisor that just incorporated last year and is already boasting over one thousand successful franchisees is likely either lying or is providing absolutely no support to those business owners. Likewise, a franchisor that’s been in business for 50 years, but only has 34 franchisees, may not offer the kind of support you need.
6. High franchisee turnover. Item 20 of the FDD reports how many franchisees have left a franchise system within the last three years. As a rule of thumb, the less expensive a franchise is to join, the higher the turnover rate will be. That’s just logical based on the business owner’s level of commitment. However, a high turnover rate in relation to the total number of franchisees—especially if startup costs are relatively high—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. If you’re still not comfortable, don’t move forward.
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.
If you’re investigating a franchise opportunity and don’t encounter any of these warning signs, there’s a good chance you’re looking at a legitimate opportunity. Even then, however, it’s best to have a team of experts (business broker, lawyer, CPA) assist you in reviewing documentation and comparing various franchise options before you settle on the right one for you.