Franchising offers an endless supply of possibilities for entrepreneurs seeking an entryway into small business ownership.
But there is also a dark side to the world of franchising: Franchising scams.
The first key to a successful franchise is knowing how to spot a franchising fraud in process before it's too late.
Each year, thousands of would-be franchise owners are duped by fraudulent franchisors who prey on their victims' inexperience and lack of knowledge.
The best way to avoid becoming a statistic is to get educated about franchising and to thoroughly research prospective franchisors for signs of fraudulent behavior.
In today's business environment, it can be difficult to separate the scams from the legitimate franchise opportunities. However, there are a few things you can look for that will give away a scam every time.
Financial State of the Franchise
It's critically important to understand the franchisor's motivation for franchising early in the decision-making process. Presumably, the franchisor is interested in adding additional franchisees because business is booming and the company is using franchising as a strategic tool for growth.
But some companies turn to franchising in a desperate attempt to keep the company afloat. When this happens, the company could care less whether or not your franchise prospers. All they are concerned about is the hefty franchise fee you are required to pay upfront.
An easy way to assess the financial condition of the franchise is to examine the franchise's sources of income. If the franchise is making the vast majority of its income through franchise fees rather than through royalties, it may be a sign that the company is turning to franchising in order to stay afloat.
Low Number of Franchisees
Another consideration is how many franchisees currently do business in the franchise. The company may have had 300 franchisees five years ago, but if they only have 5 today that should be a sign that it's time to walk away. On the other hand, if it is a new franchise with only a handful on franchisees the company is either not established in franchising yet or is simply looking to make a quick buck through franchise fees. Either way, you are probably better off moving on to a more established franchisor with a track record of success under its belt.
Lack of Transparency
Franchisors can be expected to make all kinds of claims to prospective franchisees. However, legitimate franchisors are more than willing to provide prospects with the information they need to verify those claims. If a franchisor is unwilling to provide you with the franchise's financial data or connect you other franchisees it's likely that their claims can't be verified.
As you might expect, franchising scams leave a trail of litigation in their wake. A certain amount of litigation is an unavoidable part of doing business. But an excessive number of lawsuits is a clear sign that the franchise has a history of not living up to its promises. Consult your attorney for help in determining the franchise's legal status, even if everything else appears to be in order.