6 Telltale Signs Of A Poor Franchising Opportunity
When conducting due diligence on a potential franchise investment, it is essential to thoroughly research each opportunity. It is important to be aware of potential warning signs that may indicate underlying problems. Here are a few issues to be cautious of:
1. The Franchisor is Unprofessional or Evasive
When evaluating franchising opportunities, it is essential to ask pertinent questions and carefully scrutinize the franchisor's responses. If the franchisor is unprofessional, evasive, or overly aggressive, it is a red flag. If they do not treat you with courtesy and professionalism during the sales process, it is unlikely that they will be any easier to deal with as a franchisee.
2. Existing Franchisees Are Unhappy
If a significant number of current franchisees seem unhappy, it is best to consider other franchise opportunities in Texas. Ideally, you should speak with franchisees who are content with their business's financial results and the value they receive from the franchisor.
3. High Franchisee Turnover Rates
During the due diligence process, you should review the Franchise Disclosure Document (FDD). The franchisor must disclose the history of franchisees who have left the system and the reasons for their departure. A high rate of turnover can be a warning sign, and you need to determine if it means the business is not consistently profitable.
You should differentiate between units that close due to owner failure and units that the owner sells as an exit strategy. In a younger franchise system such as salon suites franchises, significant turnover should be thoroughly investigated. If turnover is a result of franchisee terminations, this is cause for concern. Turnover due to the resale of successful units is a different matter.
4. The Franchise or Franchisee Has A History of Litigation
Review the Franchise Disclosure Document (FDD) to determine if the franchisor has a history of litigation. As a general rule, more than one or two cases per 100 franchisees could indicate a problem. It is important to examine the contested issues to differentiate, for example, actions brought by the franchisor against franchisees who are not paying their bills versus those brought by franchisees alleging misdeeds by the franchisor.
5. It All Seems Too Good To Be True
We've all heard the saying and unfortunately, in franchising, it rings especially true - 'If something seems too good to be true, it usually is'. If a franchisor is unwilling or unable to acknowledge and disclose the flaws in it's business, it is a warning sign. Transparency is essential, and a franchisor should inform prospective franchisees about both the challenges and benefits of their business.
6. Lack Of Or Poor Quality Training
Insufficient Training and Support are critical issues that can impede the success of a franchise. One of the unique features of a franchise is its established business model & franchise business plan, which franchisees follow to achieve a similar level of success. This process requires constant and effective support from the franchisor, which ultimately benefits both parties.
When a franchisor fails to provide adequate training or assistance, it may indicate that the operating system is untested or that they do not prioritize the success of their franchisees. Additionally, frequent changes to the franchise model can become increasingly difficult for franchisees to keep up with, hindering their ability to achieve success.