Warning Signs That A Franchisor Is In Trouble

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Friday, July 25th, 2008 Subscribe To Our Feed

“Look before you leap” should be your motto when you go franchise shopping. You will be putting your life’s savings into this new venture, so being extra cautious will save you from unworthy franchisors. If you are wondering how to know a good egg from the bad, here is a list of red flags that spell “Keep Your Distance”:
• The UFOC has lots of litigation and closures: Going through the UFOC scrupulously is a must. It will tell you about any litigations and closures that the franchisor has experienced. If you see litigation where a number of franchisees have joined, then beware of that franchisor. The franchisees may have found something in common to protest. Also check the number of franchisees that have closed their businesses in the history of the franchisor. If it is more than 5% to 10% per year, then there’s definitely something to worry about.
• The present franchisees are not happy: During the due diligence period, talk to the existing franchisees in the system. If a majority of them are complaining about one or other department of the franchisor, then it will be better to stay clear of the company. Hence, you are supposed to ask about every department of the franchisor – from training to ongoing support. If you are not sure whether the training promised is sufficient enough, verify with the present franchisees.
• The franchisor is too eager to sell: High-pressure tactics of the franchisor are a sure sign that the franchisor is more interested in selling a franchise than developing one. Ideal franchisors will give enough time to the franchisees to look around their company. If a franchisor insists that it is a “one-time affair” and that it is “lowering the franchise fees just for this occasion”, then chances are that this is not a good bargain. Franchisee fee is something that is not negotiable, so, if a franchisor is doing that, it must be in real need of franchisees!
• The financial conditions are not good: When you see the UFOC, look at the financial condition of the franchisor. If you are not convinced about this one thing, then, even if the franchisor has the intention of providing training and support to you, there are high possibilities that it will fail to support you.
• The spokesperson speak in different language than the UFOC: A good franchisor will speak the same language as that of the UFOC. If it’s different, clear up any discrepancies and use caution. Again, if there is no earning claim in the UFOC and employees of the franchisor tell you a figure, then it is a clear breach of trust and not a good practice at all.
• There are ambiguous termination clauses: If the franchisor has very strict closure clauses for their 10-year franchise term, it won’t be a great bargain for you. Then, even if it is not profitable, you have to carry on the business for the stipulated time.

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