5 Signs you need to Walk Away from that Franchise Opportunity

These are the five red flag signals that mean you should walk away from a franchise opportunity, Jane Masih, head of franchising at Owen White Solicitors, says

There’s an old adage that says if something looks too good to be true, it probably is. In assessing franchise opportunities, these are words well worth bearing in mind.

It’s easy to get caught up in the momentum of a good sales pitch from an enthusiastic franchise recruitment manager. The dream of owning your own business, with the financial security and freedom that’s offered, seems tantalisingly easy to achieve.

All that’s required is a commitment from you, a signature on the proverbial dotted line and payment of the franchise fee. Many potential franchisees have positive experiences, but sadly there are those for whom buying a franchise becomes more of a nightmare than a dream of independence.

Having advised prospective franchisees for nearly 30 years, there are certain signals that all is not well, which can best be summarised as follows:

The territory will be gone by Monday

You find yourself being pushed to make a decision, possibly against your gut insistent, but the fear of losing out on that key territory pushes you to make the decision anyway.

It’s true that many franchise opportunities are territory based and territories convenient to where you live or want to work are not necessarily going to be available for everyone. Especially where the franchise is a new brand, it’s highly unlikely there really is someone else interested in exactly the same territory as you who’s willing to sign before you.

Don’t allow yourself to sign up to an investment because you’re frightened by pushy sales techniques. If the investment is right, a neighbouring territory will be just as attractive.

You could take legal advice on the contract, but the franchisor is not going to make any changes, so why waste your money?

This is a phrase often heard by prospective franchisees. When considering an investment of thousands of pounds, it’s curious that the prospect of spending a few hundred pounds on independent legal advice is not seen to be a vital step in deciding whether or not to proceed.

Very often, the provisions of the franchise agreement will not be changed, but that is not the purpose of the review.

Before you proceed, you must have clear understanding of the nature of the legal relationship offered by the franchise agreement. This should include understanding the length of time you will be committed to the franchise; the amount of investment and fees required, not just initially to get the business started, but on an ongoing basis; and the nature and scope of your obligations and restrictions as the franchisee, both during the franchise agreement and, most importantly, once the agreement comes to end.

Some franchisees have left the network, but they didn’t fit the profile we were looking for

A good franchisor should understand the skills and experience required from its prospective franchisees. There should be a well thought through recruitment process that identifies suitable individuals.

If a new network seems to have a revolving door of franchisees who sign, but then leave shortly afterwards, this should ring a warning bell. Of course, not all franchisees are suitable for every franchise network and all networks have a degree of churn.

If a new network does not seem to have grown significantly, you must ask why franchisees leave the network. Could it be that they are not provided with an accurate idea of what the business involves?

Perhaps they do not understand what they will have to do in terms of sales and marketing, as well as the more technical aspects of the business? Is the training of poor quality? What practical help did they receive as they launched their business?

All these questions should be answered before you make a final decision. You should be provided with a list of all franchisees and invited to contact any of them to check their experience.

Don’t worry about who owns the intellectual property, if the business is successful, we’ll get round to sorting that out

One of the key elements of a franchise is a licence to use the intellectual property, meaning trademarks, copyright and any other rights required to use logos and brand names associated with the franchise.

If the agreement states the franchisor owns the intellectual property, but a basic search of the trademark register at the Intellectual Property Office reveals there are no trademarks registered or that the trademarks are owned by someone other than the franchisor, questions should be asked.

As a franchisee, you must have a proper and valid licence to use the brand name and logo associated with the franchise. You do not want to find that once you have signed the agreement and paid your franchise fee, there’s a dispute over your right to use the brand name. This could prove expensive and difficult for you as a franchisee to resolve.

Remember, acquiring a franchise is a big decision. Do your research, ask searching questions, take your time and don’t fall prey to pressurised sales techniques from recruitment managers focused on their sales commission and not your success.

Pilot, what pilot?

Before you commit to buying a new franchise, the franchisor should have proven the franchise exists not merely as a good idea, but as a proven business model, which it can demonstrate operates successfully through an arm’s length pilot business.

You should be provided with the accounts of the pilot franchise containing accurate real life data and not simply projections and forecasts imagined by the franchisor.

Yes, the franchisor may have a great business, but will the same business work as a franchise? If you’re to be the guinea pig for the business model, make sure you’re given financial concessions to reflect the additional risk you’re taking by being the first franchisee.