Five red flags when choosing a franchise

A franchise is a quick way to start your own business using a ready-made model and with the support of an experienced team. But not all franchises are equally good: there are often those that only bring losses. Therefore, before concluding a contract to purchase such a business, it is important to carefully study the potential partner (franchisor) and assess all possible risks.

1) Questionable product concept

A successful franchise is based on a clear understanding of what exactly the business offers to the customer. If this is not obvious and the advantages of the product are difficult to explain, buyers simply will not understand its value. This means that the business is unlikely to take off.

Be wary of franchises built on fleeting trends. A product that is popular today may be unwanted in a few months, especially if the company has no plan in case the initial interest fades. An example is franchises that make money selling trendy toys or clothing such as sleeved blankets.

2) Lack of transparent business indicators

Transparency of financial indicators allows potential franchisees to conduct a detailed analysis and decide whether it is worth investing in this business.

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Usually, basic information can be found on the franchise website: how much to invest in the project, the size of the lump sum payment and royalties, and how long it will take for the project to pay off. The franchisor usually provides more detailed information upon request.

If a potential partner avoids giving direct answers or provides incomplete information, this is a warning sign. Here’s what I recommend doing if you have doubts:

Request financial statements and profit and loss data for the last three years.
Make sure that the financial information has been verified by an independent audit, preferably for the last 2-3 years.

3) Weak brand recognition

If almost no one has heard of the franchise, the future franchisee will have to invest not only in starting the business, but also in promoting it.

4) No quality control

If the franchisor does not monitor the quality of work in its branches, this quickly becomes a problem for the entire network. Failure to comply with standards — requirements for premises, work process organisation and cooking technologies — leads to a loss of brand uniformity and recognition. As a result, not only the reputation of the individual franchisee suffers, but also that of the entire network.

5) No structured training system

Reliable franchisors are interested in their partners successfully developing their businesses and therefore provide support at all stages. Typically, the franchise package includes:

Assistance in selecting a suitable location for opening
Marketing tools — from market and competitor analysis, target audience identification to recommendations on budget allocation and promotion
Consulting at all stages — not only before opening, but also during operation
In-depth training for owners, managers, and line staff. This may include basic management training, master classes, individual coaching sessions, and access to closed educational platform