Common Franchise Red Flags
Investing in an established franchise can be a rewarding experience that provides you with a long-term source of income for years and even decades. However, joining a franchise is still an investment that carries risks. Those risks can come in the standard course of business or through the misconduct of potentially bad actors who abuse the franchise system at the expense of unsuspecting investors. Regardless of a franchisor’s intent, being mindful of possible common franchise red flags can help you objectively evaluate a franchise opportunity and avoid bad partnerships.
A Lack of Transparency About the Franchise
The process of joining a franchise, while ideally for the benefit of both parties, involves inherently conflicting interests. The franchisor needs to be careful divulging potentially valuable information about its operation to an uncommitted franchisee. Likewise, a franchisee wants as much information as possible to make a well-informed decision about the franchise opportunity.
Still, a franchisee should be extremely cautious of a franchisor who is unreasonably guarded about its disclosures to the point that it prevents you from being able to clearly consider the investment. The Franchise Rule requires franchisors to provide certain disclosures with an FDD. An FDD that contains outdated, incomplete, or otherwise non-useful information should raise questions about the franchise. Don’t be afraid to ask for additional information when this happens and be wary of those who withhold information without reasonable explanation.
Promises of Guaranteed Success and Profit Earnings
Another red flag of a franchise is a too-good-to-be-true promise of guaranteed success or earnings. This point returns to the idea that all investments carry risk, which means guarantees of success in business are nearly impossible. Any prediction about the size of earnings from the franchise or other metrics of success is just that – a prediction.
Such promises of future results usually involve assumptions based on past data or other information. Consider gaps in the information and other distinguishing factors that might discount the credibility of promises of guaranteed success (e.g., the promise relies on data from a geographic market entirely different from your franchise opportunity).
Vague or Unclear Contracts That Give Broad Discretion to a Franchisor
The franchise agreement and other legal documents are possibly the greatest measures of what owning the franchise will and could be like. As a franchisee, you’re paying a premium to invest in a proven business model and access to resources that will increase your chances of success (e.g., training, IP rights, infrastructure and other trade secrets). Your franchise agreement and other legal documents should provide a clear picture of exactly what you are buying.
Most franchise agreements are non-negotiable because of the need for consistency amongst other franchisees. However, you may want to be leery of franchise agreements with terms that are vague, ambiguous, and give broad discretion to the franchisor. For example, common franchise issues where vague and unclear terms can create problems may include:
- Rights and restrictions around the use of intellectual property
- Expectations about training, education and other resources
- Imposition of new standards at the expense of the franchisee (i.e., having to pay for rebrands, remodels, or other whims of the franchisor)
Schedule a Consultation Concerning Common Franchise Red Flags
Evaluating the risks and rewards of a franchise opportunity will always be a business decision left to the investing franchisee. However, staying aware of potential red flags from an offering can help you avoid costly franchise investments in favor of better opportunities. Working with legal counsel during the evaluation stage may also help you identify red flags and better understand your legal risks when considering a franchise.
Concerns over possible franchise red flags? Contact Franchise & Business Law Group today for a consultation.