Spotting red flags from a franchisor

On Behalf of | Oct 13, 2020 | Firm News |

Some California entrepreneurs like the idea of becoming a franchisee. They get to buy into an existing business brand without having to create their own from scratch. Franchising can also be a better option for people with less business experience. But like any business venture, a possible franchisee should know what he or she is getting into.

The sales process is a good opportunity to learn all the important facts about a franchisor. It may prevent an unwary entrepreneur from entering into a relationship with a franchisor that may result in frustration and perhaps legal conflict. Forbes lays out some of the red flags that may come up.

Lack of professionalism

Franchisors should exhibit professionalism during the sales process. If a possible franchisee has questions, the franchisor should answer them without sounding offended or evasive. An unprofessional franchisor may eventually become a problem to work with. Also, if a franchisor makes the franchise sound too good to be true, it may indicate hidden problems with the franchise that could arise later.

Questionable fees

Good franchisors focus on establishing long lasting franchisees to reap a steady flow of royalties. So when a franchisor wants to impose high up-front fees to buy into a franchise, it may signify the franchise is not on sound financial footing. Similarly, an established franchisor that wants to slash the up-front fees may indicate the franchisor is desperate for a sale, perhaps due to financial trouble.

Poor reputation

Learning about the franchisor from other franchisees may help to understand how a new franchisee will perform. If franchisees offer up inconsistent or negative feedback, it could signal trouble. Other companies or insiders in the same industry may also have bad things to say about the franchisor. If the franchisor discourages speaking to other franchisees, it could also signify problems with the operation.

Frequent litigation

A franchise disclosure document should reveal any upcoming litigation. The fact that a franchisor has any involvement in a lawsuit is not necessarily a cause for concern. As Forbes points out, in 2018 70% of franchisors had involvement in zero to one lawsuits. By contrast, only 7% of franchisors had disclosed involvement in 10 to 20 lawsuits. So if a franchisor is attracting a lot of litigation, the franchisor may have significant legal problems.


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