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Common franchise red flags

by on General

While a franchisor has certain disclosure obligations that are required by federal and state laws, they are also interested in selling their franchise. In some cases, a franchisor may paint an unrealistic picture of what owning a franchise in their system is like. Reading the Franchise Disclosure Document (FDD), speaking with existing franchisees and retaining experienced franchisee counsel, are critical steps to protect yourself.

For many, the franchise relationship can be a great partnership where both parties have some freedom to make decisions while making money in the process. However, it is essential to pay close attention to some of the common problems investors may overlook.

Here’s what to watch for as you are considering purchasing a franchise.

Restrictive rules and requirements

Owning a franchise is distinctly different from owning your own business. While you may have some autonomy on day-to-day decisions, most franchisors will have specific rules for you to follow.

Before you agree to a long list of requirements, pay attention as to how the agreement will affect how you would like to do business. Often, the business opportunity seems reasonable when you are excited about it initially but becomes burdensome once some of the novelty wears off.  Make sure to speak with existing franchisees to learn about their experiences.

As you read through the agreement and its requirements, imagine the impact on the type of work-life balance you intend to have. In many cases, a franchise agreement is not really negotiable since uniformity of a franchise often starts with the franchise agreement. If there are clauses with which you are uncomfortable and that cannot be negotiated, it may not be the right opportunity.

Overstated promises of success

Keep in mind that although you are interested in being approved as a franchisee in their system, the franchisor is trying to sell you an opportunity. Like many sales pitches, a franchisor might encourage you to speak with their most successful franchisees, rather than any middle and lower-achieving franchisees.  A full list of all franchisees in the system, as of the date of the FDD, are included in the FDD as an exhibit to the FDD.  You do not need the permission or even knowledge of the franchisor to contact anyone included in that list.

Talk to the franchisor about common traits among low and high-performing franchises and how their performance fluctuates over the first year and subsequent years. Make sure you have a clear understanding of what you can expect as you learn the business. It is important that you read through the FDD carefully to learn as much as you can about important information that a franchisor is required to provide to you before you make this investment.

Before you enter into a franchise agreement, it is important to talk to a knowledgeable franchise attorney who can help you understand potential pitfalls.