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Red flags to watch out for when choosing a franchise to invest in

On Behalf of | Oct 16, 2024 | Franchise Law |

Franchising can be a profitable business to get into. However, it can also be a headache and lead to losses if you choose the wrong franchise. Here are some of the top signs a franchise may not be as good an investment opportunity as the franchisor claims it is:

No exclusive territories

One of the top reasons franchisees fail is the lack of exclusive territories. When this happens, other franchisees open branches from the same franchise within proximity and cannibalize each other’s markets. Avoid this fate and ensure your franchise agreement gives you exclusive rights to a specific territory.

Rapid expansion and high franchise fees

This combo is often a sign that the franchisor is not earning from royalties but from franchise fees. It also may indicate that a franchisor is not interested in building the brand but merely interested in earning from franchise fees. Look at the franchise’s history and see if it helps a franchisee establish their store before opening a new one or leaves franchisees to fend for themselves and haphazardly open as many stores as possible.

You need to spend a lot on marketing

The whole point of a franchise is that it is an established brand with a ready-made market. While you may need to spend on standard marketing costs, you should not spend significantly on marketing to push their products. If you need to spend so much on marketing, the brand is not well-known, nor is it a good franchise opportunity. The name alone should be advertising enough. That is why you are buying the rights to use their name, remember?

The franchisor has numerous litigation cases

Nothing screams “red flag” more than a franchisor with a long litigation history in its Franchise Disclosure Document. This may mean nothing if the franchisor is big enough to go national or global. However, a litigious history does not bode well, as it indicates that franchisors and franchisees fail to resolve disagreements amicably and must go to trial.

When in doubt, seek help

Unfortunately, not everyone may be lucky enough to know these red flags before investing in a franchise. If you are one of those unlucky few already stuck between a rock and a hard place, consider contacting us for a free consultation.

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