Franchises - Top 10 Warning Signs

Posted by Sara

May 4, 2008

Are there bad franchises? YES!!!!!! Just because a company is offering a franchise does not mean anything. While there are very good companies to invest in if you are thinking about a franchise, any company can offer a franchise. To help you out listed below are some of the warning signs you should be looking for if you plan on investing time and money into a franchise.

Investing in a franchise is costly and can wipe out a life savings. If you aren’t comfortable with the answers you are receiving, feel rushed, or things just don’t feel “right” then slow down and think things over before you sign contracts.

Weak Financial Statements: A warning sign yes, but not always a bad thing. Weak statments will be more of a risk, but if the company is new and growing it might also work in your favor. Remember all businesses had to start at the bottom.
No Answers: If you are asking questions and you aren’t getting answers, walk away. I take that back, RUN. If they don’t want to give you answers then they don’t have answers you want to hear.
The Hustle: Even in business and the franchise world you get the hustlers. Investing this much money is not a quick choice to make. If they are rushing you to sign paperwork like a used car dealer in a leisure suit with oily hair, do not walk run to the nearest exit. Do not let anyone rush you into investing. If they say the offering will close soon, let it close without you.
Product Price Sqeeze: Can the prices be competitive in the market? Will there be any supply problems? Talk to other franshisees and find out what they think.
High Turnover Rate: Like in a job what is the turn over rate? How many franchisees have left the business? The UFOC can answer this question for you. How high is too high? That depends on the business, if it is a low investment franchise then the turn over rate will be higher.
Attorney Avoidance: Do not be afraid to consult an attorney when thinking about investing in a franchise. If the franchisor doesn’t want an attorney involved, saying that it will complicate things, or saying things to discourage you from talking to an attorney then you do not want involved with the franchisor either. Simply put “RUN”.
Too Many Lawsuits: Item 3 in the UFOC will give a 10 year history of lawsuits. If the list is long find out why and get details, otherwise avoid the franchisee because something isn’t right.
Earnings Claims Mumbo Jumbo: A tricking subject but if it isn’t in the UFOC then you probably won’t like the answer. Federal law prohibits them from answering this question if it isn’t listed in the UFOC. Remember that and take it to heart, if they didn’t list it, then you won’t like it.
No UFOC: Federal law requires you receive a UFOC before you sign contracts or pay money. If they don’t have a UFOC then you need to walk away from the franchise. NEVER EVER sign contracts or give money to a franchise without a UFOC.
Consistently Bad Reports: How bad is bad? Visit current franchisees, talk to them. If they are all giving you the same bad reports, then you need to think twice about investing. Your fellow franchisees usually have protected areas so they won’t have a problem talking to you. If they don’t have anything good to say about the company or on a certain topic of the business find out more information before you go further.

Remember buying into a franchise is a risk, it takes times, money, and a lot of work. Like all businesses it is a commitment which can last years and you can lose or make a lot of money. Never rush, research a lot, and make sure you know what you want before you sign on the dotted line.

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