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Top 15 Red Flags When Buying a Franchise

13 August 2021

I’ve been asked by several people over the last few months to help explore franchise options available to them.

There are a lot of good reasons to invest in a good franchise if it is the right fit for you. However, I’m increasingly finding that while people spend an incredible amount of time understanding the business model and possible returns, they don’t go into enough detail about how the franchise has been structured to ensure they are making the right long-term decision.

This short checklist has been created to help you identify and avoid some of the red flags in the franchise buying decision. You can complete the checklist below in our handy calculator:

question

✅ Yes
🚫 No

What to look for – your franchise checklist

Give yourself a point when you can answer with a confident ‘Yes’ –

  1. There is an early exit clause allowing an exit with most of the initial investment recoverable if things don’t work out
  2. The contract term is not more than 5 years with an option for the franchisee to renew at the end of the initial contract term
  3. The non-compete criteria (for product/ service, industry and location) are clearly and specifically defined with no broad-brush or generic terms used
  4. The franchisee can independently provide non-competing services alongside the services the franchisor offers (see above point)
  5. The target customers of the franchise business would find it difficult to be serviced by a non-local business
  6. The target customers of the franchise business, when looking for the product/ service, would naturally look to local channels rather than industry, national or global competitors
  7. The franchisor allows sales to customers outside the territory if they are inbound enquiries who have sought the franchisee out
  8. The ongoing payment to the franchisor is less than 5% of the franchisee’s revenues
  9. The franchisor has evidenced demonstrable proof of Intellectual Property
  10. There is no continual minimum performance requirement to remain in the franchise
  11. The franchisee is allowed to completely own and control their web presence, digital marketing strategy and collateral
  12. All the current and future products/services of the franchisor are included in the franchise agreement for the investment being made
  13. The franchise specifically prevents the franchisor from selling products/ services in the territory and competing alongside the franchisee
  14. The franchise agreement is less than 20 pages long
  15. No personal guarantees are required

Key:

If you scored 8 points or lower: Give the franchise a pass. There are too many red flags.

If you scored 9 – 14 points: Get a solicitor to vary the franchise agreement you are signing to cover the identified red flags

15/ 15: You are likely dealing with a scrupulous franchisor. Go for it.

If you currently own a franchise or have done so in the past, I’d love to hear your thoughts on what else you believe a potential franchisee should be wary of.

Drop me a line or add a comment below.

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