Starting A Franchise? Here Are 5 Franchise Red Flags To Avoid

There are many great reasons to transition from the traditional workforce to franchise ownership. However, if you are considering making the change in search of greener pastures, you need to make sure that you avoid common franchise red flags. That’s because, while investing in a strong franchise can generate a great return, selecting the wrong franchise can generate a lot of frustration, headaches and regret.

In a recent video, as Vice President Of Bin There Dump That and Franchise Coach, I explored five of these red flags that new franchise operators should avoid. So before you sign that franchise agreement.

A Weak, Missing Or Incomplete Franchise Disclosure Document

All franchisors must provide a Franchise Disclosure Document (FDD) to prospective franchisees. The FDD should contain detailed information regarding the franchise’s operational model, financial performance, leadership team and the specific terms of the franchise agreement, including the franchise fee and royalty payments.

Good franchisors will not only give you the FDD, but they will encourage you to be as thorough as possible in reviewing it. They will be willing to engage in a dialogue and answer any questions that you may have. After all, they want their franchisors to be as knowledgeable and comfortable as possible.

On the other hand, poor franchises may delay the delivery of the FDD, or the document may lack critical information. In these situations, franchisors are likely to be unwilling to answer questions that arise or provide the level of detail that you need to make an informed decision. If you think a franchisor isn’t being completely truthful, honest and transparent, that should raise concerns — and a big red flag.

Pending Litigation

Lawsuits are a part of life, and a part of business. Therefore, you shouldn’t automatically cross a franchise off your list if it is facing pending litigation. However, you should do your homework and find out what the lawsuit (or lawsuits) are about, the merits of the case and whether or not there is more litigation on the horizon.

Conduct research online, or speak to an attorney for an expert opinion. Investing in a franchise that can’t stay out of the courtroom doesn’t leave you much room for success.

Heavy Debts

New franchisors typically take on debt to establish and build their businesses. However, established franchise companies should have paid off that debt and achieved financial stability. If a franchisor itself can’t make a profit, chances are you will have a tough time making one as well.

Unhappy Franchise Operators

Nobody understands what it’s like to run a specific franchise better than the people who are actually running it.

franchises in debt is one franchise red flag

Therefore, the most important part of franchise due diligence is speaking with existing franchise operators to gauge the good, the bad and the ugly about the franchise system.

Speak to as many franchise operators as you can, and try to converse with those that are successful as well as those that are struggling in order to get a complete and accurate picture of the state of the franchise. Take the feedback seriously and consider all angles and perspectives. If there is an issue that comes up often, or if you consistently hear negative things about the franchisor, then you may want to steer clear.

They’re Selling Instead Of Awarding

Good franchise systems are as selective in their choice of franchise operators as you are of them. However, there are franchise systems out there that are more interested in selling franchises to new operators and collecting franchise fees than they are in creating a successful business model and providing support.

Starting a franchise is never easy, but it’s all too easy to buy into these types of franchises — all you need is a checkbook. The hard work of doing your due diligence and finding a franchise that can use your skills and experience — and won’t just use you for your money — will be worth it in the end.

You’ll Give Us The Green Light

At Bin There Dump That, we want new franchise operators to be confident in their decision to join our team. That’s why we provide a comprehensive Franchise Disclosure Document to every prospective franchisee and engage in a two-way dialogue where both parties can answer questions, address concerns and achieve clarity.

We follow proven operational best practices and adhere to the highest levels of customer service in order to avoid and mitigate potential litigation, and we have the financial stability and resources to support our franchise operators. Lastly, while we have grown quickly since 2004, we have also grown responsibly, and we only award franchise locations to people who have the traits necessary to be successful.

If you’re one of them, we encourage you to take the first step in becoming a Bin There Dump That franchise operator by downloading a free franchise kit today. Or, start our month-long FREE e-mail course, 9 Common Franchise Myths — BUSTED!

 

Images: Danger sign, Empty pockets

 

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