The opinions expressed by (*4*) authors are their very own.
We all know that in every industry there are good, strong, well-managed firms, but there are also firms… not excellent. This is also the case in the world of franchising. It will be a challenge to know what to look out for – especially if you are considering owning a franchise for the first time.
While there are many strong franchisors on the market, it is important to understand, especially for first-time franchise owners, that finding the right solution takes a lot of labor up front. As a long-time franchise consultant, I’ve compiled a list of some warning signs to be careful for when evaluating a franchise opportunity.
Here are 4 red flags to be careful for.
1. The current opinion of the franchisee is negative
During the discovery process, you’ll have the opportunity to speak directly with current franchisees. Without being rude, ask honest and blunt questions. The best practice is to establish contact and ask more general questions first, and then move on to financial matters at the end. If current franchisees are unhappy with the parent company or don’t see the value in their franchise, this is a major red flag.
Ask your current franchisees these three questions:
- Would you do it again?
- Are you considering expansion?
- How can I fail in this business? (This query explains what key skills or traits are needed to achieve success in this method.)
2. The franchisor’s leadership makes you are feeling uncomfortable
Trust your gut! During the discovery process, you’ll have the opportunity to meet with the franchisor’s leadership teams. If you are getting bad vibes from your management team or their representatives, listen to your intuition. Think of the franchise structure as a business partnership. You each bring something to the partnership and will have obligations to the other – so are these people you’ll be able to work with? Finding a trustworthy company is extremely essential.
I know this may increasingly sound a bit esoteric, but it is important to know this franchisor’s track record. Is this their first rodeo? More specifically, do they have a proven track record of franchise success? They could also be good at providing service to customers, but when they transition to franchising, their latest business will support franchise owners, which requires a different skill set. It’s essential to look under the hood and see if the franchisor is operating on its own or if it has other successful businesses inside its operations.
There are franchises that come up quickly and don’t have the support needed to gain trust. Before you choose to purchase a particular franchise, get to know the franchisor and its management team.
3. Questionable fee structure
It is expected that the franchisor would require an upfront fee and royalties, but it is essential to understand the fee structure from the starting. If, while conducting your due diligence, you notice that a particular franchise has significantly higher fees than comparable franchises, this could improve your hearing.
Items 5 and 6 of the Franchise Disclosure Document (FDD) are the fees you pay to the franchisor. It’s essential to take the time to review and compare this stuff. Understand that not all fees paid to a franchisor are bad – but you would like to understand what you are getting for that fee and how it will compare to how you’ll do it yourself.
For example, let’s say you look and see an item you pay the franchisor called a “technical fee.” It’s value considering what this fee actually covers. Often, a franchisor will have the resources to purchase state-of-the-art technology tools because they purchase them on a large scale to cover the needs of their entire franchise operation. Compared to the costs of a similar lower-tech product available on the market, it is much cheaper and more efficient. In this case, this “technical fee” is value it.
4. The sales process is unclear
A great franchise might be as picky about you as you are about them. If you think franchisors are selling you a bad used automotive, it’s a bad sign. A great development representative won’t just push someone through – they’ll evaluate your work history, personality, experience, financial situation, and expertise. All of those facets will be assets to their brand and careful consideration must be given to the individuals who will represent the brand. If you are using low-selling tactics and you are feeling pressured, that is a red flag.
For example, if you would like a latest automotive and are trying to choose from a Toyota Camry and a Honda Accord – each similarly rated cars – but you have a terrible experience with one of those dealers, you most likely won’t buy that automotive.
If a franchisor has a poor sales process, it might indicate greater concerns. You should expect professionalism, answers to your questions and a sense of transparency. Part of the sales process also needs to include contacting other franchisees in their network.
What is called validation, or talking to franchisees in the system, is a tried and true a part of the sales process that I consider one of the most significant elements. After all, what higher way to discover what’s good, bad and ugly about a brand than by talking to individuals who already own the brand? If a brand prevents you from talking to other franchisees in its network, that is a huge red flag. A great franchisor will try to contact as many franchisees as possible.
Ultimately, it is unimaginable to predict all possible red flags; nevertheless, if you ask the right questions and know some of the telltale signs to look out for, you may be ahead of the curve. To avoid these warning signs (and others), working with an experienced franchise consultant will be a great safeguard.