5 Red Flags to Avoid When Buying a Franchise
Thinking about buying a franchise for the first time? With all the great selling points an eager franchisor may be offering, combined with getting caught up in the dream of owning your own business, it’s easy to be persuaded to purchase a franchise that turns out to be a dud. It pays to do your research, be thorough and listen to your instincts when thinking about buying a franchise.
To avoid making a big (and costly) mistake, watch out for these five red flags:
Inconsistent FDD information
The Franchise Disclosure Document should be the “be-all and end-all” when it comes to information about a franchise. Make sure your lawyer reviews the document for you. Occasionally, franchisors will make a verbal commitment to do something that’s not included in the document, or will tell you something that conflicts with the document contents. If this happens, ask that they amend the document accordingly to reflect this new information. If they refuse, take your business elsewhere.
A lot of litigation
Avoid any franchise that’s had numerous lawsuits filed against it. Do a little research into any litigation that has occurred. It’s possible that former franchisees sought legal action to blame the franchisor for their failure to succeed within the business, but if this has happened many times, it’s a red flag. It’s also worth noting that a franchise that has filed lawsuits may not be a bad thing–if a franchisor feels the business’ reputation is compromised, they should make efforts to defend the brand.
Before committing to a franchise, it’s important to seek out both current and former franchisees to get their take on the business. If you keep hearing negative feedback from franchisees, do some extra research to see if there’s anything to the complaints. Get a copy of the business’ complaints history from the Better Business Bureau and see how issues were addressed before deciding if you want to get involved with a franchise that doesn’t do a good job of responding to and solving problems.
Not enough training and support
One of the main reasons entrepreneurs purchase franchises in the first place is that they typically come with a built-in training and support system. However, if that’s not the case with this franchise, it may be best to look elsewhere. Does the training program’s curriculum sound as though it will give you the skills you need to take over? Are training instructors well-qualified and experienced? What’s offered in terms of ongoing support? Chat to current franchisees to see how they feel about training and support opportunities within the franchise.
No matter how great a business person you are, no one wants to take on a company that’s already on the rocks financially. Make sure that a financial expert reviews the FDD for you to flag any possible issues and give you a frank outlook on the franchise’s financial state. If this franchisor needs investors like you just to stay afloat, go elsewhere–no matter how low the cost may be–and choose a successful, flourishing franchise instead.