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Buyer Beware: Franchise Warning Signs

July 19, 2011

Buying into a franchise concept can be an attractive way for some people to become business owners. Ideally, a franchise company has a proven business model, saving new business owners the time, energy and money they would have to expend building concepts on their own.

Unfortunately, I've found that many franchise companies don't live up to this ideal. Think of all the hype a few years back surrounding bricks-and-mortar eBay drop-off stores. Many of those operations have now failed.

These aren't isolated stories. Research conducted for the U.S. Small Business Administration found that only 62 percent of small franchise firms started in 1986 and 1987 were still around by 1991. Nonfranchise firms or independent companies meanwhile had a 68 percent survival rate.

Franchises can still be a good opportunity, but doing more than just glancing under the hood is essential. The franchise should allow you to focus on the business and making money, rather than spend your time creating systems.

As a consultant helping people find franchise opportunities, I've spotted a number of warning signs over the years:

Here is what can make a franchise company stand out from the crowd:

Also make sure that the franchise company is the best fit for you. Just because it's a good business doesn't mean it's a good business for you. Not everybody is wired to be a poet. Not everybody is wired to be an accountant. Not everybody's wired to run and manage every business.

Pay careful attention to what a typical franchisee does in the business every day. Make sure you have the skills it takes to win, and that you find the work to be meaningful and enjoyable.