“Red flags” or indications that further investigation may be prudent before you commit to a franchise investment.
The decision to invest in a franchise is a life-changing event. It is incumbent upon every prospective franchisee to thoroughly investigate a franchise opportunity before signing the agreement.
Much has been written about the steps you should take in conducting your due diligence, but below are some “red flags” or indications that further investigation may be prudent before you commit.
- High-Pressure Franchise Salesperson: A good franchisor wants to make sure that there is a mutually good fit before “closing the sale.” If you’re being pressured into making a decision or you feel like you haven’t had the time to think everything through – don’t sign. If their franchise opportunity is that spectacular or the line of potential franchisees is that long, why are they hounding you? Could it be that their franchise opportunity is not that spectacular, or their line is not that long, or that they need your initial fee to make their payroll?
- The Salesperson’s Explanations are Different than the Information in the FDD: If the franchise salesperson or broker is making promises or commitments over and above what is in writing in the Franchise Disclosure Document (FDD), make sure you have the contract amended to include their promises. The only support that the franchisor is obligated to provide, and the only provisions that the franchisor must abide by, are those that are in the contract. For example, if the agreement states that your territory is limited to the four walls of your store but the salesperson promises not to establish another store within a three-mile radius, get it in writing.
- The Franchise Salesperson Doesn’t Follow Through: We recommend to our franchisor clients that they put prospective franchisees through some hoops to see how they’ll respond if they become a franchisee. The same is true of the franchisor. If you’re not getting answers to your questions on a timely basis or the franchise salesperson doesn’t keep their word during the courtship, what will the marriage be like?
- Poor Validation from Existing and Former Franchisees: No one is in a better position to know if the franchisor has lived up to their promises and provided leadership to the franchise network than franchisees – both current and former. Sure, there are always a few disgruntled franchisees and they may have had unrealistic expectations to begin with, but when there are more negatives than positives or more than one common complaint, it’s time to sit up and take notice.
- History of Litigation: Litigation is not inherently a bad thing in a franchise system. In fact, a good franchisor will litigate when necessary to protect the brand. And, you can even expect that dissatisfied franchisees will blame the franchisor for their shortcomings. But excessive litigation can be a sign of trouble in a system and bears digging a little deeper.
- You Don’t Feel Comfortable with the Level of Training and Support Provided by the Franchisor: Take a look at the length of the training program, the subjects to be covered, the composition of the program (is it all lecture or does it include some actual hands-on experience?), and the qualifications of the training instructors. If you’re not confident that you’ll learn what you need to know to operate your business, did a little deeper. Did current franchisees learn enough in training to operate effectively? Do they get the help they need on an on-going basis from qualified support staff? The same is true for ongoing support; do you feel confident that the support identified in the agreement is adequate to assist you in managing your business?
- The Franchisor is Not Financially Stable: Unless you’re a CPA or experienced in reviewing financial statements, have the FDD reviewed by a professional. A franchisor may have the best of intentions when they promise support, but if they can’t afford to provide the support you need, you may be the loser in the end.
How many red flags are acceptable?
A franchisor may have a good explanation for one or perhaps even two red flags. Three or more, and I’d run – not walk – to the nearest exit.