Warning Signs When Selecting A Franchise

  • It's easy to get excited about investing in a franchise-just look at the numbers: There are 757,000+ franchised small businesses in 75+ different major industries.
  • Franchises account for nearly $1 trillion in U.S. retail sales and for more than 40% of all U.S. retail sales.
  • Approximately 1 of every 12 retail business establishments in the USA is a franchise.
  • And franchises employ more than 8 million people!

While all of this speaks well for franchising, not all franchises are worthy of your investment. Be careful. Do your homework. When you're considering a franchise investment, beware of these warning signs:

  • You can't get answers from the franchisor -- Sometimes this occurs because the franchise is popular and managing the lead flow is difficult. And sometimes this occurs because the franchisor is not prepared to answer your questions, doesn't want to answer your questions, or simply isn't well managed. You have to wonder: Does this franchisor believe in systems?

  • The franchisor seems too eager to sell you a franchise -- You're getting more emails and calls from the franchisor than you believe are necessary. Do you want a franchise that may need you more than you need them? (If you do, that's okay! Maybe you can negotiate a better deal).

  • You can't get the franchisor's disclosure document -- In the USA, once serious discussions begin between a franchisor and a prospect, the franchisor must provide the FDD, free. Can't get it? What's the franchisor hiding? The FDD must include a franchise agreement, the franchisor's audited financial statement, and a list of the franchisees current and past.

  • Existing franchisees either won't talk to you, or they have negative things to say about the franchisor -- Keep in mind that sometimes franchisees do not want more franchisees in the network. It's important to call a representative sample of franchisees. If most speak negatively about the opportunity, think twice. Always ask this question: "If you had the opportunity to buy the franchise again, would you?"

  • The franchisor has been sued repeatedly by franchisees -- Any franchisor in highly litigious America with more than a few franchisees will likely get sued. It's important to ask: Why? . . . How were the suits resolved? . . . What has the franchisor done to avoid future lawsuits? Franchisors are not always wrong. But if they're spending more time in court than in the field helping franchisees, think twice about investing.

  • The franchisor has sold many more franchises than it has opened -- Why? If franchisees are waiting for months to get into business, what's going on?

  • The franchisor tells you which franchisees you can talk to as you conduct your due-diligence -- It's okay for a franchisor to direct you to franchisees whose backgrounds are similar to yours, or to bring franchisees to Discovery Day to meet you. But make sure you randomly select franchisees and talk to them about investing in the business.

  • You feel pressured by the franchisor or the franchisor's sales representative, including a broker -- "There's only one franchise available for your market and you're not the only person who's interested in it." Well, la-di-da . You should be more interested in knowing if you are the best-qualified person for the franchise. Don't buy under pressure.

  • The franchisor isn't interested in assessing your personality profile to see if you're a good fit for the franchise -- You can't force a square peg into a round hole. Most franchises are fabulous opportunities, but for the right personalities. If your personality doesn't match the requirements of the franchisor's business, you lose!

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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