Franchising 101: Beware of 'Red Flags' When Buying a Franchise

Buying a franchise business can be a great way to become your own boss while working under a recognisable brand with an existing customer base. But not every business offers a good deal, so being able to spot the warning signs of a bad franchise is crucial if you’re to invest your money wisely.

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Most franchises out there are fantastic opportunities for budding entrepreneurs, offering training schemes, ongoing business support and the chance to network with a huge number of like-minded people. However, there is a small proportion of organisations promising more than they can deliver.

So, what’s the difference between a good and a bad franchise? Here are the seven red flags you should look out for as you research investment opportunities.

The warning signs of a bad franchise

1. The franchisor promises 'easy sales'

Nothing in life is guaranteed, including franchise success. If you encounter a franchisor who says you’ll be able to secure easy sales and unusually high profit margins, they’re probably lying to you. Being a franchisee is hard work; it takes dedication and persistence, no matter the popularity of the product you’re selling.

2. The franchisor goes in with the hard sell

If you feel pressured into signing a franchise agreement or think the franchisor is rushing you, walk away. Buying a franchise business is a big step, so you should take the time to think it through fully. Plus, starting a professional relationship with someone who uses intimidation or suspicious sales tactics is not recommended, as you’ll need to be able to work closely throughout the contract term.

What’s more, it’s in a franchisor’s interest to make sure they only accept the right candidates, as they risk losing money and damaging their business’s reputation if the partnership fails. So, it’s unlikely the franchisor of a legitimate business will want to rush the sign-up process.

3. The franchisor fails to provide financial statistics

Franchisors should share lots of relevant documentation with prospective investors, including previous sales figures. So, if they don’t, they’ve probably got something to hide. If a franchise allows its franchisees to build up successful businesses and turn a good profit, there’s no reason the franchisor shouldn’t be open and honest.

If the franchisor cannot answer your questions or seems to be deliberately withholding information, think twice before investing your hard-earned money.

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4. The franchisor is vague about your financial obligations

Once you’ve signed a contract, you’ll be obligated to pay ongoing fees, so every prospective franchisee should make sure they know exactly how much money they’ll be asked to contribute. Franchisors should provide investors with a franchise disclosure document with an in-depth look at their financial obligations. If you don’t receive an FDD or it doesn’t include much information, be wary of the franchise.

Even if the franchisor provides a run-down of all the payments you’ll need to make as a franchisee, we always recommend you consult a solicitor with experience in the franchise sector. They’ll be able to thoroughly review the document and check there are no hidden fees.

5. The franchisor is vague about training and support

One of the most important factors to consider when buying a franchise business is whether the franchisor offers a structured, comprehensive training programme. The more prepared you are for running your business, the better it’ll perform and the more the franchisor stands to benefit. So, legitimate franchisors should heavily invest in introductory coaching schemes and ongoing business support.

If a franchise opportunity involves limited support or the franchisor is vague when it comes to discussing training opportunities, you should tread carefully. Do you really want to join a business with a franchisor who shows little regard for your professional development?

6. The franchisor is evasive about contacting existing franchisees

Meeting with people who have already invested in the franchise is a great way to find out what it’s really like to be a part of the business. By speaking to both new and experienced franchisees, you can get a thorough understanding of the benefits and drawbacks of being a franchisee, as they’ll have no reason to lie.

If the franchisor discourages you from meeting their franchisees or tries to pick out certain investors for you to contact, they probably don’t want you to see the full picture. Chances are, a proportion of their franchisees are dissatisfied with their experience.

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>> Read more:

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7. The franchisor can’t provide plans for future development

A good franchisor should always be looking to the future and identifying ways to expand their business. They should be able to discuss their current plans and tell you how you fit in.

Although business growth is a positive sign when you’re buying a franchise unit, you should find out about the franchisor’s intentions to make sure they don’t negatively impact your branch. For instance, if the franchisor intends to flood your territory with additional units, you may end up competing with nearby franchisees and struggle to reach your projected sales figures.

If the franchisor hasn’t offered you an exclusive territory, and is reluctant to write this into the contract, you should be extremely careful about your next steps.

What to look for when starting a franchise business

• Check to see whether it’s a member of any of the industry-recognised regulatory bodies, such as the British Franchise Association (BFA). If it is, you can be sure it operates ethically.

• Talk to existing franchisees and thoroughly check the origins of any testimonials or references provided by the franchisor.

• Talk to customers and read reviews. Although this won’t necessarily tell you about the franchise opportunity, it’ll give you an idea of how the business is viewed generally.

• Seek advice from an independent lawyer or franchise professional. They’ll be able to review all the paperwork and make sure you’re investing your money in a legitimate business.

• Visit the franchise’s head office. You’ll be able to make sure the business has a real office and get a feel for its workplace culture. Often, you’ll have the chance to meet the team in their HQ during a ‘discovery day’, so sign up for one if you get the chance.

Buying a franchise business

If you keep these ‘red flags’ in mind and carry out your franchising due diligence, you should be able to invest in a franchise with confidence.

Ultimately, the best way to prepare for buying a franchise unit is to do your homework; discover as much as you can about the business and the sort of profits you stand to make. The franchise disclosure document should cover areas like customer demand and local competitors, but you should always validate the franchisor’s claims by performing your own research.

For more information on buying a franchise and running your own business, see our articles for franchisees.