Watch Out For These Red Flags!

At Franchise Success Center, we strive to identify quality franchisors for our members to consider. Our goal is to avoid the franchisors that carry the red flags or warning signs discussed below but these potential areas of concern bear repeating even for our members.

If you’re trying to evaluate franchise opportunities on your own, you need to be on the look out for these issues and, if you come across these situations during your due diligence into a franchise opportunity, you definitely need to ask more questions and dig deeper or, depending on the circumstances and the explanations you receive, may need to walk away from the opportunity.

The Red Flags:

1. High pressure franchise salesperson. If you feel as though you are sitting at the salesperson’s desk of a used car lot waiting for the sales manager to make you an offer you can’t refuse … something is wrong. A good franchisor wants to make sure that there is a mutually good fit and that you are comfortable and committed to the franchise and will give you all the time you need.
2. The salesperson’s explanations are different from the information in the franchisor’s Uniform Franchise Offering Circular (the "UFOC") or the Franchise Agreement. Worse yet, the salesperson tries to downplay the importance of these documents or suggests “that’s a bunch of lawyer stuff.” Oral promises are meaningless. If the salesperson is making promises or commitments over and above what is in the Franchise Agreement you will sign, be sure to have the contract amended to include their promises.
3. You can’t get straight answers to your questions.
4. The reality of franchise life as expressed to you by the franchisees in the system does not match up with the picture painted by the franchisor or as expressed in the UFOC. Some franchisees may have had unrealistic expectations before joining the system. Some will be quick to blame the franchisor for any problem. The red flag is not the occasional hiccup. You’re looking for pattern of failures or a common theme of discontent.
5. Excessive or unexplained litigation. In today’s business world, litigation is, unfortunately, no longer uncommon. In some situations you want to see that a franchisor is willing to litigate to protect its brand or trademarks or to terminate franchisees who do not comply with the franchisor’s standards (afterall a bad franchisee will cast an adverse reflection on you and all other franchisees).But too much litigation, especially with franchisees, can be a warning sign that something is amiss. Ask questions about the dispute, why it had to go to court and how it was resolved. Try to get all sides of the story.
6. The level of initial or ongoing training is not sufficient or the franchisor does not have a system in place to provide ongoing support in the field. Attitudes about and the level of devotion to training and support differentiates franchisors. Look hard at the length and substance of a franchisor’s training program. Are the trainers truly qualified? What happens once you open your location? Current franchisees are a great source of information on these issues. Ask them if they received and continue to receive what they feel they need.
7. The franchisor is not financially stable. Most people will not be able to make this determination on their own. Here is another example of the need to have qualified professionals on your team. Have your CPA review the UFOC and the franchisor’s financial statements. Having a great business model and systems is one thing; making money and being financially sound and thus likely being around in the future may be another.

Finding a red flag does not end your inquiry. A franchisor may have a good explanation. But the more warning signs you come across, the more hesitant you should be about becoming a franchisee in that system.

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Franchise Success Center provides educational and broker services but is not qualified to advise in any part of the purchase of a franchise or business opportunity. This report in no way offers business advice. Investing in a franchise is a complicated and serious matter. You are urged to seek professional advice and to consult with a franchise attorney, an accountant, and/or other professionals before you make your decision.