5 Ways To Spot A Dubious Franchise Opportunity

Not everyone is lucky enough to secure a Subway, 7-Eleven or any other brand perennially appearing in Entrepreneur Magazine’s top 10 franchise opportunities. Many would-be franchises have to …

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Not everyone is lucky enough to secure a Subway, 7-Eleven or any other brand perennially appearing in Entrepreneur Magazine’s top 10 franchise opportunities.

Many would-be franchises have to look instead at less heralded names. Whether it’s a brand you’re dimly aware of or a complete unknown in the formative stages of franchising, thorough research and a healthy dose of skepticism are essential when appraising a franchise opportunity.

All the advantages of buying a franchise – proven formula, trusted brand, training and support – can be turned on their head if you’re too hasty in signing on the dotted line.

And you’ll probably have to plunge thousands of your own savings into the business should you buy a franchise, so do your due diligence diligently.

Here are some tell-tale signs that a franchisor’s sales pitch is overblown and the franchise best avoided.

1.    Upfront fees or undue pressure to commit

A reasonable franchisor will want you to take your time in making such a momentous decision. A wise franchisor will exercise patience themselves; they need to be sure that you’re the right person to represent their brand as well as vice versa.

Be wary, therefore, if a franchisor applies pressure early on – and indeed at any point – for you to sign a binding franchise disclosure agreement, then they’re probably more interested in your money than getting the right franchisee or building their brand.

Classic sales tactics like urging you to commit before someone else beats you to the punch should be met with “thanks but no thanks”. It should not be a case of first come, first served; the franchisor should want the best person available.

And if they ask for an up-front payment, keep your wallet firmly closed.

2.    Franchisor is vague and evasive

Be suspicious if the franchisor is vague or evasive about plans for expansion, what your role will involve and other key details.

Be aware, however, that sometimes franchisor has just cause to be evasive. While non-disclosure of financial figures might reflect unfavourable accounts, it could also be due to genuine concern that the data would be misleading or risk exposing sensitive information to their competitors.

The best way to gauge the company’s financial health is by speaking to existing franchisees – which brings us to our next tip.

3.    Franchisor restricts access to existing franchisees

Speaking to existing franchisees is by far the most important part of your due diligence. They’ve already taken the plunge and have no reason to deceive you – unless they’ve been bribed by the franchisor.

Which is why it’s better to speak to franchisees of your choosing. Should the franchisor be reluctant to let you speak to existing franchisees then it’s reasonable to assume that they’re not faring well in their business.

“Any franchisor who is reluctant to give you access to their network” should be viewed with suspicion, says Catherine Foulkes, head of franchise recruitment at internet franchise TheBestOf. “Some franchisors will say ‘you can speak to those two people, but nobody else’ and that would ring alarm bells for me.”

4.    Negative press – or no press

In the age of the internet there’s no excuse for remaining ignorant of controversy associated with a given franchise.

Search the company name in Google and Google News to uncover any scandals or PR disasters. For example, a fast-food chain might be at the center of a food poisoning scandal or a cleaning franchise the subject of a lawsuit relating to allegations of hiring illegal immigrants for below minimum wage.

It’s worth checking online forums and social networks too – although don’t necessarily believe everything that you read.

“There’ll always be some bad news there because there’s always somebody who’s been disillusioned,” says David Duncan, an area representative at internet marketing franchise WSI.But you have to take a viewpoint and a balanced judgment on what’s an acceptable level of bad news about that particular franchise.”

Perhaps even worse than bad publicity is no publicity at all. Struggle to find any mentions of the company, even to find its website, and you’re probably dealing with an outright scam.

5.    Unreasonably large franchise fee

A large franchise fee shouldn’t necessarily deter you in and of itself because franchises vary wildly in cost for good reason.

Requiring neither premises, a van nor stock, internet marketing franchises invariably sit at the affordable end of the price spectrum, for example. At the pricier end are sectors like, say, kitchen refitting, which might necessitate a large showroom and expensive stock.

If a franchise seems expensive then compare it to similar franchises in the same sector. If it’s more expensive than its counterparts then ask the franchisor why – they may be able to justify it convincingly.

But if they’re evasive and flustered by your question then you’re entitled to view it as poor value.

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