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No Sure Thing: 8 Big Warning Signs When Buying a Franchise Business
1. Unit Failures: Ask for or locate the history of the franchise's other units. Over the years, how many unit failures or closings has it seen? A steady stream of failed units could indicate that its competitors are more capable and that its business model has serious problems when it comes to stability. More recent rashes of unit failure could indicate changing trends or perceptions in the marketplace and may point to a more profitable option.
2. Promise of Quick Wealth: If a franchise talks a little too long and hard about how much money YOU can make, hold back and look for other options. Franchises that try to dazzle you with profit figures are typically hiding something, like unmentioned expenses or a model that functions more like a pyramid scheme and less like a real business.
3. A Silent Franchisor: Does your franchisor answer your questions? Call you back quickly? Offer training advice? These are good signs. But beware the franchise that is slow to respond, keeps information hidden, and does not offer much in the way of consultation. These franchises could be hiding something…or they may just be bad at managing their franchisees. Either way, you lose out.
4. A History of Lawsuits: Look up the public record of your franchise and check out its lawsuit history. Look for any lawsuits that indicate problems, like frequent suits by other franchisees or lawsuits that indicate poor business management, fraud, and operational problems. This can offer valuable insights on what franchises are struggling and which have their feet on firm ground.
5. Up-Front Fees Without Contracts: Up-front fees without the promise of anything in return are the sign of a scam. Always be extra-careful of a franchise that requires you to pay something before they offer you a contract to sign. Be especially careful it is a small, loosely held franchise without a long history of franchisee relationships. Use common sense and don't give any money away for no reason.
6. Negative Franchisee Advice: Call up other franchisees in the same brand and ask them for their opinion on the company. Some may give you bad advice just to quell the competition, but overall you can develop a valuable portrait of the company. If the majority of franchise owners tell you horror stories about their experience with this franchisor, then back away carefully.
7. Finances that Don't Check Out: Review franchise financial statements and look for danger signs, such as a debt ratio that does not match expected industry figures or expenses that raise more questions than they answer. Beware signs of inflated income, troubling stock ratios, and other problems that indicate instability. If you do not have much experience when it comes to reading financial statements, consider hiring an auditor to take a closer look.
8. Inflated Promises: You should receive a franchise disclosure document or a similar document in the process of franchise negotiations. Compare this document closely with everything the franchise has told you. Sometimes franchises make promises that they simply do not keep. Beware promises about guaranteed profits, low royalty fees, or exclusive rights over a certain territory. The contracts may have caveats that make those all sales pitch with little truth. If it seems unusually positive or pushy, make sure it is in the contract before you believe it.
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Adam Johnson is a professional blogger that provides tips and information on franchise opportunities and investments. He writes for FranchiseExpo.com, the place to find the best franchise opportunities available.