If you are thinking about buying a franchise, there are many opportunities in a variety of industries that you may find suitable. However, like everything else in life, while searching for the right franchise for you to buy you need to be on the lookout for potential scams when buying a business. You will have to be wary of these scams while searching for your perfect franchise opportunity, and take precautions so as not to fall prey to them.
Avoiding a franchise scam is the best defense against losing your investment to an unscrupulous franchisor. Here are some red flags that may indicate you are dealing with a potential scam artist:
- The absence of prototype. All successful franchise businesses emanate from having a prototype or model. This is where the entrepreneur tests the business concept for a duration of time.
- No Identities of Franchisees. Franchisors will always be glad to identify where the franchised operated branches are located. After all a real sign of a successful franchise is the way franchisees are operating and managing the branches.
- The franchisor promises exorbitant returns. Responsible franchisors do not guarantee specific rates of return because they realize your success depends in a very large part upon your commitment to your own success.
- The franchisor claims 100% of their franchisees are satisfied 100% of the time. Even the most successful franchise systems experience problems at some time.
- The franchisor uses high-pressure sales tactics to convince you to buy their franchise. Often times a franchisor wants to pressure you through the sales process if they have something to hide and don’t want you to find out about it.
- If the franchisor gives evasive answers to your questions. When you ask standard questions related to the franchise, the franchisor should be able to immediately be able to give you direct and straight-forward answers.
- Steep franchise fees the franchisor can justify. Typically, a franchisor’s upfront fees are designed to cover their costs of recruiting new franchisors and helping them establish their franchise. The fees should not represent the franchisor’s primary method of generating a profit; this profit should come from back-end royalties generated by successful franchisees in the franchisor’s system.
- No proper support organization. For franchising to be successful, it is necessary for the franchisor to create an organizational support like training, quality and standard compliance, research and development.
- Improper selection of franchisees. Applying for a franchise takes and involves a process. The franchisor has an identified criteria which must be met prior to signing and accepting the applicant.
- Cut and paste Franchise Agreement. The heart of the relationship is found in the franchise agreement. It contains principles in franchising as well as policies for both parties to observe.
- Find out if there have been any lawsuits filed against the company. You can also talk to current franchisees to find out if the franchisor is up to no good or if they do all that they promise to do.
These are just a few of the questions you will need to assess in determining whether the franchise is a scam. Your outside advisors will be able to help you put aside your entrepreneurial burn to get into the game and assist you in conducting a proper due diligence on the opportunity. Don’t get into a franchise unless you have the assistance of a qualified expert.
There’s no single indicator of a franchise scam and you need to weight all of the indicators in making your assessment. Just remember, there are hundreds of superior franchise opportunities available today and there is absolutely no reason to settle for less than the best opportunity in your investment range.
sources: bizben.com, everyfranchise.com, entrepreneur.com.ph