How to steer clear of bad franchises
When you’re first researching franchises, it can be difficult to establish whether they're an excellent investment opportunity or not. Important information is not always readily available, different people may give you conflicting advice, and there may not seem to be substantial differences between businesses. However, once you know how to identify a bad franchise, the process becomes a great deal more straightforward. Here, we take a look at the best ways you can steer clear of bad franchises.
Do your research
The most important thing to do before you make any decisions regarding the suitability of a franchise opportunity is thorough research. Generally, good franchises will ensure that there's plenty of information available to prospective franchisees, while those with something to hide will be reluctant to divulge too much, lest they reveal their true colours. However, this isn't always the case. Sometimes, bad franchises can put on an extremely effective public façade, and it's not until you start digging deeper that the reality becomes clearer. Likewise, some good franchises haven’t quite figured out how to market themselves to franchisees and don’t make enough information available to the public. Your research should include;
- The company website – is at as professional as you would expect from an established franchise?
- Franchise financial records – if these are available, the franchise’s financial history should be analysed.
- Newspapers and other media – Look for stories online. Has the franchise ever been involved in scandals or received other types of negative press?
- The franchise management’s history – have any of the franchise managers experienced legal or financial problems? Does their story add up?
Talk to the franchisor
Once you've performed your research, it's a good idea to draw up a shortlist of potential franchise opportunities and begin contacting every franchisor. You can learn a lot by spending a little time on the phone with someone, and this is particularly true when it comes to franchisors. They should be willing to give you their time, speak honestly about the franchise opportunity, and inspire confidence in you. They shouldn’t avoid answering your questions, come across as disinterested, or try and pass you off to a colleague. As a franchisee, you want to work with a franchisor that’s just as willing to support you, as you are them.
Talk to franchisees
Once you’ve had a chat with the franchisor and found out as much as you can about the franchise, it’s a good idea to try and collaborate this information with personal accounts from existing franchisees. If the franchisor isn’t hiding anything, they should be able to provide you with a full list of contact information for their franchisees. If you request this information from the franchisor and they offer to put you in touch with one or two franchisees, be wary. They could be the same two franchisees who are wheeled out every time a potential franchisee approaches the business because they can be trusted to ‘toe the party line.’
Visit the franchisor’s headquarters
Speaking to the franchisor on the phone is one thing but meeting them in person is another thing entirely. However, the best policy is to visit the franchisor’s headquarters. This way, you’ll form a clearer picture of how the franchisor works, be able to read their body language and see how the central franchising team treat you as a potential franchisee. The management team should be interested and excited by your visit, be open, honest, and be willing to answer any questions you may ask. They shouldn't be afraid to show you around a little, and you shouldn't feel as though anything is being withheld from you.
Take legal advice on the franchise agreement
Franchise agreements can be complicated legal documents that require professional interpretation if you're to understand every aspect of the contract fully. Every franchise purchase is subject to an incredible number of conditions and clauses, many of which are expressed in tricky technical terms and legal jargon. If you want to be sure that what you’re signing is entirely legitimate, unlikely to put you in a compromising financial position, and a fair deal for both franchisor and franchisee, you'll need to take expert legal advice. Try and find a lawyer who specialises in the franchise business model, as there are many peculiarities specific to franchise law.
Be on the lookout for scams
Like any business opportunity, some people want to take advantage of those with money to invest. While franchise scams aren't common, they do exist, and potential franchisees need to be aware that they do pose a serious and significant problem. You should also know how to identify a scam and what to be on the lookout for. This can include;
- Whether the franchisor has previous experience in the industry. If not, you may be taking a risk.
- Whether the franchisor has experience in your geographical area. If not, you may be a test case and not provided with all of the opportunities and support you require.
- A chequered management history. If the franchisor has frequently and repeatedly changed jobs, moved between industries, and never really stayed put for too long, alarm bells should start ringing.
- Does the franchisor have a history of bankruptcy or financial irregularities?
- Is the franchise fee too high for a relatively unknown business?
While it’s important to know what you’re looking for, the best way to establish whether a franchise is a good or bad opportunity is to dig deep and do your research. There's plenty of resources available to screen franchise managers' histories, and the franchisor should be more than willing to provide this information freely. Your gut instinct also has a big role to play in the process – if something feels dodgy, it’s time to step back and look at the evidence. Don’t rush into any decision and don’t let the franchisor push you before you’re ready to jump. A good franchisor is one that understands the importance of this decision and that gives you the time, space, and information to make it.
The Editorial Team, Point Franchise ©
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