I'm a Franchise Consultant -- These Are The 5 Franchise Warning Signs To Look Out For What to look out for when researching a franchise opportunity.
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For those looking to take the leap into business ownership for the first time, franchising is one of the best options. Ideally, a franchise has a proven business model, saving new business owners the time, energy and money they would have to expend building concepts on their own.
However, not all franchises live up to the ideal of being a turn-key business with everything one needs to get started. Or worse, the promise of success — especially with emerging franchises — is not always guaranteed.
Franchises can still be a good opportunity, but it's imperative to do extensive research and watch out for warning signs before committing to a concept.
As a consultant helping people find franchise opportunities, I've spotted some key warning signs to take note of before opting into a franchise.
Related: Considering franchise ownership? Get started now and take this quiz to find your personalized list of franchises that match your lifestyle, interests and budget.
Top five franchise red flags to look out for before buying in:
Franchisees aren't making the kind of money to meet financial objectives. Item 19 on a Franchise Disclosure Document (FDD) explains how much money a prospective franchisee could make from the franchise. Ideally, the franchise company breaks down the range of what franchisees are earning from their operations: top third, middle third and bottom third. If the middle-third of franchisees aren't making what you would need to meet financial objectives, walk away.
- Franchisors blame franchisees. Don't let a franchise explain poor performance of the middle and bottom tiers by saying the franchisees don't understand the system. So what if the existing franchisees are lousy? If the franchise can't recruit correctly, what makes you think its operating system is any good? Steer clear of franchises that don't take ownership of poor performance.
- The model is in a perpetual state of flux. If the franchise is constantly tinkering with the concept, you need to be asking why. The model simply may not work. One of the key factors of a successful franchise is a replicable business model. If it seems disorganized or in flux, walk away.
- Compliance is more important than results. Does the franchise run a collaborative environment wherein they listen to franchisee concerns, or is it a bureaucratic nightmare demonstrating low concern for franchisee results and relationships? Speak to current or former franchisees and ask about the relationship with the franchisor and what resources are available for times in need.
- Keeping it in the family. Sometimes franchises can become a little too cozy, and turn into benevolent dictatorships where there is high concern for relationships and low concern for results. Look out for franchisors laced with a lot of family. Too often, I see franchise companies where owners choose relatives for positions, and not considering who might actually be the best person for the job. A good franchise needs highly skilled and seasoned management that favors competence over nepotism.
Top three green flags to look for in a franchise:
The executives have integrity. Do the franchisees say they trust the people running the company? Look for franchises with a sense of purpose and inspiration. When push comes to shove, what motivates these people? Whatever franchise you're looking into, research the owners. Do you find links to their charitable work or rip-off reports?
- The business model is unique and timeless. If a franchise is making money today, pay attention but don't become enamored. Will it make money seven years from now? Do some research on the concept and consider if it'll still be profitable in the long run. I remember a franchise whose concept hinged on helping business's design websites back when the Internet was still new. The idea worked for a time, but wasn't sustainable.
- The company respects its franchisees. McDonald's is top-tier when it comes to collaboration with franchisees. Most multimillion-dollar McDonald's ideas — including the filet of fish sandwich — came from franchisees. Much of the company's success has come from recruiting gifted franchisees who know what they're talking about. McDonald's has a reputation for respecting and listening to them, too.
Most importantly, make sure that the franchise company is the right fit for you. Just because it's a good business, doesn't mean it's a good business for you. Pay attention to the day-to-day tasks of a typical franchisee, and make sure you have the skills, as well as finding the work meaningful and enjoyable.