Franchise Warning Signs You Should Never Ignore

Franchise Warning Signs You Should Never Ignore

If you are considering buying a franchise, there are several warning signs you should not ignore. Of the more than 3,000 franchises available for investment today, a majority of them provide wonderful opportunities for entrepreneurs. However, there are also some bad apples that should be avoided. So how can you tell the difference?

If you are thinking about buying a franchise in 2016, you should steer clear of those that exhibit any of these warning signs:

Many franchisees are not making the money you want to make. In Item 19 of the Franchise Disclosure Document (FDD) you will find information on what potential franchisees can expect to make. Many franchisors provide a range – top, middle and bottom. If what you want to make can only be found in the top echelon, this may not be the right fit for you.

Franchisees get the blame. If a franchisor consistently blames franchisees for poor or middling performance, they obviously don’t have a good handle on the people who will make their system work well. Don’t invest in a system that turns out a lot of failures.

The business model is constantly changing. Having a proven business model is what you invest in a franchise for, so if you find a franchisor that is constantly tinkering with their business model, keep looking.

Lots of conflict between franchisor and franchisees. You don’t want to become part of a stressful work environment – many people start their own businesses to escape just that. If a franchisor doesn’t create a collaborative environment, you probably don’t want to invest.

Too many family relationships. Be attuned to franchisors that have lots of managers who are related to each other. A good franchise operation needs skilled executives and seasoned management, attributes that are rarely found all in one family.

Unit decline. Every franchise is required to report their unit counts in Item 20 of the FDD. If the franchise you are considering has a declining unit count, this is a big red flag.

Litigation. Examine Item 3 in the FDD to determine if litigation between the franchise and its franchisees has been on the rise in the past few years. This can be a sign of increased failure rate among franchisees.

Financials. Examine the franchisor’s financials carefully, looking for financial stability – profitability, positive cash flow and strong reserves. If you have trouble reading a financial statement, get help from an accountant.

Same-store sales. You want to see a continued positive trend in same-store sales over time. You will need to ask the franchisor for this information since it is not required in the FDD.

Franchisee attitude. Make a few calls to existing franchisees to get a read on their attitude toward the franchisor and assess whether or not they would make the same decision to invest in the particular franchise.

A franchise attorney can be an invaluable asset to those searching for or starting a franchise opportunity. Contact one of the experienced Florida franchise attorneys at Jurado & Farshchian, P.L., at (305) 921-0440, or email us at info@jflawfirm.com.

 

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