What To Look For In Franchise Opportunity

Notice the franchising red flags. 

Joining any franchise organization should not be an overnight decision; this is something you’ll want to do research and due diligence on. This is a life-changing decision, so take your time making it; we’ve noticed that 45 to 60 days allows the candidate enough time to make an educated decision. The last thing the franchisor or new franchisee wants is surprises.

What is an FDD?

The Franchise Disclosure Document is a legal document that a good franchisor should provide to you. This document is designed to tell you everything there is to know about that company.

TIP A good franchise organization that you’re looking into will encourage you to read through that document, maybe have a lawyer look at it and come back to them with a bunch of questions and comments and anything that you need clarification on. Look out for any red flags, and trust your instincts in this process. 

Franchise Disclosure Document (FDD) 

Is there any litigation? 

Is anybody suing this particular company? While this doesn’t mean the company is bad but if there is litigation going on you need to find out. This could spark other questions you may have or assumptions you had reading the FDD. Note if there are many this could be a red flag. 

How indebted is the franchisor ?

Do they owe a lot of money? Are they at risk themselves? Have they gone out on a limb to create this franchise company?

It’s important to know that debt is not bad; we understand that businesses in North America can go into debt to help build the business. However, a franchisor who has been in business for a long time should not be in debt. Value a company that is well established, financially stable and able to support its franchise organization.

Validation Calls

Speaking with existing franchise operators in that organization to find out everything there is to know about the business from someone in the business. A good franchise operator should always be willing to talk to new people coming into the system. Franchisors understand it is in their best interest to help people make good decisions. They want great individuals to go into the network.  

TIP Speak to as many existing franchise operators as you feel comfortable. Find some that are successful and some that are still on the path to success. Get both sides; no matter how good the company is, there will always be people at both ends of the business. 

Selling vs Awarding 

It’s essential to understand the difference between a franchisor that sells their franchise agreement and a franchisor that awards a franchise agreement. Take a few seconds to reread that; there is a big difference. 

A franchisor that sells their franchise agreement is making money off collecting your initial franchise fee. Essentially they are selling the franchise; they bring people in simply because they have the money, not because they’re a good fit. This is not the kind of organization you want to be involved in.  

A franchisor that awards a franchise agreement is a good franchisor who understands that the process is an awarding process. They go through an essentially mutual interview process. The same way you are interviewing and doing your due diligence, the franchisor is doing the same. They’re looking for if you’re a good fit for the network. It will grow successfully if they do a good job and bring the right people to the web. 

Therefore, watch out for these red flags while doing your homework. It’s essential to make sure you do everything you need to make a good decision.