Choosing a franchise is a long and time-intensive process. Once you invest your time and resources in evaluating a particular brand, it can be difficult to walk away. But, sometimes you should walk away, as the time and resources you have invested to date are nothing compared to what you stand to lose in the future. Here are seven signs you should walk away from a franchise opportunity from national franchise lawyer Jeffrey M. Goldstein.
1. The Franchisor is Involved in Litigation
In Item 3 of the Franchise Disclosure Document (FDD), franchisors are required to disclose any pending litigation as well as their recent litigation history. If the franchisor is involved in litigation that could threaten its viability, now may not be the time to invest.
2. The Franchisor is Facing Bankruptcy
The same is true if the franchisor is facing bankruptcy—which you can find out in Item 4 of the FDD. While some companies use bankruptcy as a restructuring tool, filing for bankruptcy typically isn’t a good sign.
3. The Franchisor’s Fees are Higher Than Its Competitors’ Fees
As a franchisee, your margins are likely to be very small. If your franchisor’s royalty and marketing fund fees are higher than those of its competitors, you could struggle to turn a profit at all.
4. The System is Contracting Rather Than Expanding
Growth is a hallmark of a healthy franchise system. If a franchise system is contracting rather than expanding, you will definitely want to find out why before you commit to buying a franchise.
5. Current and Former Franchisees Suggest Staying Away
When conducting your due diligence, one of the best things you can do is talk to current and former franchisees. If these individuals tell you to stay away, you might want to listen.
6. The Franchisor’s Financials or Financial Performance Representations Aren’t Good
If the franchisor is not on solid financial footing (which you can determine by reviewing its financial statements in Item 21 of the FDD), buying a franchise could be very risky. Likewise, if you don’t think you could earn a living based on the franchisor’s financial performance representations (FPR) in Item 19, you should question why you are still considering the franchise.
7. You Can’t Get In Touch with the Franchisor
If you can’t get in touch when you are trying to buy a franchise, imagine how difficult it will be to get in touch once you are locked in as a franchise owner. As a franchisee, you will need to rely on the franchisor for support; and, if that support isn’t there, you won’t be getting what you paid for.
To be clear, none of these are necessarily deal breakers. When evaluating franchise opportunities, prospective franchisees must consider all relevant factors and make an informed decision based on all of the risks and opportunities presented. When the risks start to outweigh the opportunities, this is when you may need to make the decision to move on.
Request a Free Consultation with National Franchise Lawyer Jeffrey M. Goldstein
Do you have questions about a franchise opportunity? If so, we can help. To schedule a free consultation with national franchise lawyer Jeffrey M. Goldstein, call 202-293-3947 or request an appointment online today.
