5 Warning Signs To Look for When Considering a Franchise

For many people, the prospect of owning their own business is an exciting one. Investing into a franchise gives one a sense of security, knowing there’s a business model in place and other franchisees have been successful with it. Franchises account for over $1 trillion in U.S. retail sales, and while this number is compelling, potential franchisees need to do their research on the brand they plan on investing in and highlight any warning signs.

Given that you will be putting a large chunk of change into this business, it’s necessary to take a look into the franchise to ensure the corporate team is just as invested in seeing you succeed. Here are the warning signs to look for when considering a franchise:

1.) Legal Trouble

Most large franchises in the U.S. are likely to be sued, and franchising itself is a litigious industry. But the questions you need to ask yourself when researching the brand are: Why were they sued? Did the lawsuit come to a resolution? Is this a recurring lawsuit topic from many different franchisees? Has the franchise made an effort to correct the wrongdoing that got them sued in the first place? 

Lawsuits are not uncommon in the business realm, and franchises are required to be upfront about ongoing litigation in the franchise disclosure document; but how a franchise learns and shows growth following the lawsuits can tell you if this is a good business venture for you.

2.) Personal Bankruptcies Within The Management Team

One of the most appealing aspects of franchising is the support and guidance you receive from the franchise management team. In many franchises the franchise management team consists of the CEO, general manager, franchise support manager, franchise founder and other support representatives. However, how can you confidently invest your money into a franchise that has members of their management team with personal bankruptcies? 

3.) A Record of Failures

Whenever you’re exploring a potential venture, you should look not only at the venture’s successes, but its failures too. Ask the franchisor about franchises in the system that have gone under and why. Google the brand and add the phrases: “out of business,” and “bankrupt.” If you find yourself looking into a brand that has multiple failed franchise locations and a management team that is all too eager to bring you on board, push the pause button and think this through.

4.) Poor Statistics on Current Units

The franchisor should provide you the current number of units the brand has, how many are making money, breaking even or losing money. Speak about this in depth and ask questions about why particular locations are losing money or only breaking even. These are the franchisees you should contact and ask if they feel as if they have enough support from the franchise management team.

5.) Mixed Signals

Once you’re in a serious discussion about coming on board with the franchise, are they overly eager and pushy to have you? Do they clam up and take unusually long to respond when you ask difficult questions? Ensure that you have all components of the FDD, which includes the franchise agreement, the franchisor’s audited financial statement and a list of all current and past franchisees. With this information, you should be well equipped to research and verify this information is accurate.