Franchise Prospector » Research & Buying
How to Protect Yourself from Franchise Scams
Researching Franchise Opportunities
Scamming has a long history in the franchise business. This is in part due to the fact that when the idea of franchising first got put into motion over five decades ago, it presented an extremely enticing and lucrative opportunity for many eager entrepreneurs. Indeed, it was - and still is - a very powerful tool for enterprise expansion that has provided great opportunities to countless business people throughout the world. Unfortunately, as with many business negotiations and investment opportunities, those who wished to defraud others definitely had their place in the early days of franchising - and traces of these fraudulent activities remain franchise business practices today.
While in the past the abuses of investors' trust extended to practically unbelievable proportions - including false franchisors selling established franchises that had not yet been established, bloated claims about foreseeable profits, and many more bad practices - today the scams and bad deals have taken on a much more subtle disguise. Through a wide variety of methods such as brushing over unsavory legal and financial information and not disclosing certain aspects of the nature of every franchise sale, companies that sell franchises are still to this day able to get away with selling people on what turn out to be very bad investments.
That's why it is crucial for entrepreneurs and investors alike to carefully research the endeavors that they are interested in. By knowing what to look for in an honest corporation - and knowing the signs displayed by those not-so-honest organizations - the savvy entrepreneur will be able to forge a path towards a wise and profitable investment. Indeed, asking the right questions and keeping ones eyes peeled for warning signs is a great way to conduct oneself through the process of franchise research and investigation.
One of the first features of a prospective franchisor to look out for is a low level of financial responsibility. It is important to be able to tell why, exactly, the company is so interested in having another franchisee on board. Is it because they are a thriving organization making a calculated move toward growth and expansion, or is it a last ditch effort to avoid having all of their internal office equipment repossessed? Making the call on this one could save the investor thousands if not millions of dollars when all is said and done.
A good way to determine the financial situation is by analyzing their sources of income. An investor should be able dispense with worry if he or she sees that the company is actively pulling in money from its allotted percentage of its franchisees sales - the fee known as the royalty expense. However, if the company is depending on franchise sales for mere survival, it is probably a good idea to walk away from the franchisor altogether.
Another vital aspect of the company's past worth looking into is the record of litigation that it carries. Yet investors should not step back at the first lawsuit that they see in the file. If a company has previously had to resort to lawsuits against various franchisees in order to uphold standards of quality and effectiveness of branding, then this can actually be a positive mark on their name. If, on the other hand, there are many instances in which the company is the recipient of lawsuits, then this is a matter definitely worth looking into. In fact, it's probably a sign to steer clear from the organization entirely.
After learning about the basics of the legal and financial features of franchise companies, it would also be wise to find out how to spot the pitfalls of poor franchise business experience. This is due to the fact that while it is natural and indeed well recognized that a long list of companies like to expand and diversify their types of operations, only the honest corporations will be up front about the novelty of what they are trying to interest the investor in. Watch out for franchisor organizations that may try to sell an individual entrepreneur on a business model that has not been properly time tested. For example, if a franchisor tries to sell a business that has six times the floor space of all the other operations, the network of support will be useless. That's because the company will have had no experience with this type of business. Therefore, the investor might rightfully decide to walk away.
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