Franchise Investment: The Good, The Bad and The Ugly

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Originally uploaded on 13/12/2017. Updated on 01/04/2019.

Buying a franchise can be a life-changing event. The opportunity to be your own boss and in control of your career progression is an attractive proposition. However, franchisees must ensure they undertake thorough research before signing a franchise agreement to ensure that the franchise itself is right for them.

There is a vast amount of good franchises around, but unfortunately there are some bad ones too; and some that are just downright ugly. Conducting due diligence is crucial, but here are some key signs to look out for when youre approaching potential franchise opportunities so that you can tell the top notch from the terrible.

The Good

The security of buying a franchise business that is packaged and ready to go can be invaluable when it comes to turning over a profit. There are plenty of opportunities that are well worth the investment, and here are just some of the tell-tale signs that youve chosen a good one.

It has a well-developed business model. When you buy into a franchise concept, you avoid many of the challenges that new start-up businesses face because the franchisor has already learnt from their mistakes. With a solid business already established, a good franchisor will have made sure that everything is structured and ready for you. This includes branding, marketing and training. When this is the case, franchisees are able to hit the ground running and concentrate on profitability from the outset.

It prioritises franchisee success. All good franchisors understand that their success relies on the success of their franchisees. As a result, they should allow franchisees a certain amount of freedom to tailor their particular business to their territory. This will help ensure that franchisees feel empowered and fulfilled, increasing the likelihood of profitability in the long-run.

It encourages communication. A good franchisor works to develop a culture of trust throughout the business. The relationship between franchisor and franchisee needs to be based on open and honest communication in order to succeed. Therefore, franchisors should maintain consistent communication with franchisees and listen to their thoughts and concerns.

It has developed a strong brand. A franchisor that wants success for their franchisees will continually work hard to reinforce and protect the brand. Customers tend to look for names they recognise and continue to visit brands they trust even in times of economic uncertainty. By upholding the reputation of the brand, a franchisor ensures that the business continues to generate a positive turnover even in the toughest of times.

It offers quality training programmes. When looking into the training offered by specific franchising opportunities, you should look for quality over quantity. Guidance shouldnt stop after the initial training programme; good franchises continue to support franchisees throughout their time with the business.

The Bad

Its fair to say that if you are familiar with the signs of a good franchise, you should be able to spot a bad franchise. Here are some red flags to look out for when it comes to franchising.

Its franchisees express criticism. When youre conducting your due diligence, franchisors should encourage you to meet with existing franchisees. This demonstrates that, firstly, they have nothing to hide and, secondly, they want to support you in your decision-making process. If franchisors try to block you meeting franchisees or want to handpick the ones you talk to, the chances are theyre expecting you to hear negative reviews. You should also avoid franchises if the franchisor fails to follow through on his word or answer your questions in a timely manner.

It displays inaccurate information in disclosure documents. The Franchise Disclosure Document (FDD) contains important information about the opportunity and it should help you decide whether to invest in a franchise. Its important that you ask a specialist franchise solicitor to review the document with you. They will be able to advise you if the franchisor makes a claim that conflicts with the documentation. This is a sure-fire sign that this might not be a good franchise investment.

It has financial instability. Good franchises recruit quality franchisees to grow and expand its already successful business. If it seems that the franchisor needs your investment to stay in business, you should find another franchise. Asking a solicitor or an experienced franchise financial advisor to review the FDD should help you determine the franchisors financial stability.

It offers inadequate training and support. Comprehensive support is one of the key advantages of the franchise system. If it appears to be lacking, it might be worth investing in another opportunity; without the support of an experienced franchisor, the chances of success are extremely limited.

The Ugly

Choosing to invest in a franchise opportunity is a big decision. You should perform thorough research and due diligence and only sign on the dotted line when youre totally comfortable with the entire concept. If at any point you feel that youre being forced into deciding before youre ready, it might be wise to walk away.

The franchisor puts pressure on you to make a decision. A franchise worth your investment will not come with pressure; if it does, the chances are that the opportunity is not as amazing as the franchisor may have led you to believe.

It is an established franchise but has few franchisees. If you come across a franchise that has been trading for many years but only has a couple of franchisees, beware. This could be a sign that franchisees are not willing to invest in or stay with the franchise. Sometimes franchisors can prevent previous franchisees from damaging their reputation by badmouthing them. This means that bad investments arent always obvious, so trust your instincts if something doesnt feel right.

No matter how brilliant a franchise seems to be on the surface, you should collect as much information as you can and make an informed decision. Before you commit to a franchise, do your homework to make sure that the franchisor ticks all the boxes and is stable as well as successful.

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