Watching Out Red Flags in Franchise Business – Part 1

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Franchise can be a simple option of business particularly for beginners and those with small budgets. Many popular names are known in this industry. They include MacDonald, Starbucks, and various names of local brands. Franchise has been coming into even small towns in developing nations. On the other hand, franchise is one of commonly misunderstood industries. Some overlooked facts about the industry commonly lead the business owners into failure. Actually, watching some red flags in franchise business can help prevent you from bankruptcy.

Must-Watch Red Flags in Franchise Business

Watching some red flags in franchise business can help you identify possible problems. Then, you can take necessary actions to prevent them or at least to minimize the risks. Here are top signs of red flags to watch when buying a franchise:

Too Good to Be True

Business opportunities that look too good to be true are probably a sign of red flags. The same case happens in franchise business. When meeting a franchisor that does not want to recognize any single flaw in his business, then you can count it as a red flag. There is business, which free from flaws.

red flags in franchise business

In fact, transparency is more important in franchise business. A good franchisor will share the good and the bad things about his business. Therefore, be careful with a franchise opportunity that is claimed to be risk-free and flaw-free.

Too Aggressive Franchisor

When buying a franchise, make sure to pay attention to the franchisor. Ideally, a franchisor offers the opportunity along with details about the business. They include the profits, the possible risks, partnership fees, and requirements. However, a too aggressive franchisor can be a red flag.

It is acceptable that he tries to encourage you to be a franchisee. Sometimes, they use personal approach to convince you. However, too aggressiveness can make him look unprofessional. In addition, this kind of trait is likely to end up invoking conflict in the partnership. Logically, when someone behaves in an evasive way during the negotiation and sale process, he will behave worse when you become a franchisee.

Focus on Short-Term Returns

A franchisor that seems to focus only on short-term returns is one of red flags in franchise business. He tries to maximize up-front fees, rather than long-term relationship. Anyone knows that long-term royalty is the key to a sustainable franchise. Therefore, when he focuses only on short-term cash flow, it is likely that the business is not potential in long terms.

Difficult Validation Process

When you meet a franchise that seems to control the validation process too tightly, this can be a red flag. For instance, the he seems to be reluctant to provide information on the contract number, legal documents, or written agreement. He may even tries to make a deal with you without signing a contract.

Be careful with a franchisor that makes legal process complicated. If you continue the partnership and unnecessary conflicts happen in the future, a written agreement can protect your investment.

In addition to the four red flags in franchise business above, you need to pay attention to some other signs of a bad franchise. Do not miss them in the next post!

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