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Avoid: 7 warning signs when buying a franchise

Dr. John Hayes

Dr. John Hayes

 

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+ 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 they employ more than 8 million people!

But which franchise to buy?

While all of this speaks well for franchising, not all franchises are worthy of your investment. Be careful. Do your homework before you buy a franchise. When you’re considering a franchise investment, avoid these 7 warning signs:

  1. 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 franchisor who may need you more than you need them?
  2. 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?
  3. Existing franchisees either won’t talk to you, or they have negative things to say about the franchisor and/or the franchise brand. Keep in mind that sometimes franchisees do not want more franchisees in the network. It’s important to call a representative sample of franchisees.
  4. 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?
  5. 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 before you buy the franchise.
  6. 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.” You should be more interested in knowing if you are the best-qualified person for the franchise. Don’t buy a franchise under pressure.
  7. 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!

There are more than 7 warning signs when buying a franchise and I discuss them in my best-selling ebook, Buy Hot Franchises Without Getting Burned.

 


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10 thoughts on “Avoid: 7 warning signs when buying a franchise

  1. Davidson

    Very useful and concise article. The research part of the franchise process is one of the most important aspects in assessing realistic profit margins not just figures from the franchisor!

  2. Antidote

    This is a very interesting article. I am planning on starting a food franchise for over 6 months now and a couple of weeks ago I found one that matches my requests but I have doubts that matches point 6 from your article. The franchisor is pressuring me, not giving me time to consider if I’ll make a good investment. Should I back off?

  3. johnhayes Post author

    It’s always difficult to tell someone what to do without knowing all the circumstances. However, if you don’t have a good feeling about a franchisor, that’s a good enough reason to back off. Conversely, why not tell the franchisor how you feel? If the franchisor backs off and gives you more time, you may come to a decision to buy. If the franchisor doesn’t back off, then I would back off if I were you. There are plenty of good food franchises — they’re everywhere — and I can’t think of one that I would HAVE to buy. So take your time and don’t stop looking — chances are there are at least a few more food franchises that will meet your requirements.

  4. Antidote

    I will try to tell the franchisor to give me time to think just to see his reaction. Thank you for your advice.

  5. tebutebu

    This is a very useful article. I have been to a lot of Franchise exhibitions and the franchisor’s always want to convince you on the spot to sign up. I try to make it a point of duty to always go away and do a proper assessment, like you have mentioned in this article. However I am not sure what kind of questions I should be asking that would help me make an informed decision. Do you have any pointers regarding this? Maybe a list of important questions to ask?

  6. Alex

    I definitely agree: if the communication between you and the franchise seems too eager or too stressful (the far ends of the spectrum), you should walk away ASAP!

    Being in the middle to higher end of the spectrum sounds like it would be best.

  7. Amy Peterson

    That’s funny you say that as #1 because that’s one trait was actually going to look for. But I see your point. I’d want them to believe in my potential and feel optimistic about our partnership, but not be desperate. #2 Good to know! #3 What’s an example on how to go about this? Just call franchisees in other states perhaps? Should you do this before you even talk to the franchisor? #4 How much of an initial investment should I anticipate, how much waiting time is there usually, and how to you figure out the ratio of how many they’ve bought versus opened? Would this be in the disclosure talked about in #2? #5 Good point as well. #6 As with anything! #7 As with anything, you do have to find out if you’re a good fit. Thank you for the insights.

  8. johnhayes Post author

    Hello Amy. To answer your first question, yes, call the franchisees. Or visit local franchisees. It’s difficult to do much of this before you get the franchise disclosure document because that doc includes a list of the franchisees with contact information. However, if you can talk to a few franchisees in advance of meeting the franchisor, and then more after meeting the franchisor — that works. . . . The disclosure is an extremely important tool for you and yes, it provides information about openings and closings. As to the initial investment, these range widely from concept to concept — a service business that you can operate from home is likely to be much less expensive than opening a retail unit, or a restaurant or hotel. Best wishes!

  9. Linda

    I agree, I have been asked to sign up with no time to research at all. Especially at the fairs since they try and play on the fact that you are face to face for that day only and this “deal” won’t be around after today. But what if you really think you are a good fit for this particular franchise despite hearing bad things? Couldn’t they be the square pegs and not you?!

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