8 Franchise Red Flags of Less than Ideal Opportunities
As with any business venture, franchise opportunities come with certain risks. Candidates should be aware of franchise red flags that can indicate a bad investment. You can find important information in the Franchise Disclosure Document (FDD) that will help determine if a franchise opportunity is all it appears to be on the surface.
What are some franchise red flags? Here is what to be aware of before buying a franchise.
Red Flags to Look for When Purchasing a Franchise
Red Flag No. 1: Fees
If a brand’s franchise fees are higher than the competition, find out why. Another red flag is when a franchise gets most of its revenue from the initial fee. This is especially true for franchises that are not in growth mode and have many operating locations over a long period.
Red Flag No. 2: Experience
The experience of a franchisor is a benefit of buying a franchise. If you notice a franchisor doesn’t have a lot of business experience, you may want to work with a more established brand. Franchise ownership challenges can be greatly alleviated with great leadership and support.
Red Flag No. 3: Litigation
Litigation is also important to consider in terms of what red flags to look for in a franchise contract. It is a red flag when the franchisor is constantly in legal disputes with franchisees. While there are legitimate reasons for a franchisee to be terminated, there are legal avenues to take if the franchisor did it unjustly. All franchise contract issues should be handled by legal professionals.
Red Flag No. 4: Turnover
If there’s high franchisee turnover, more closed locations than opened ones, and a high number of sold but not opened franchises, this could be a red flag. This could be a sign of franchise pitfalls to come because of a shoddy track record of helping business owners succeed.