Deciding on a franchise concept to invest in is serious business. Just going on gut instinct alone just won’t cut it. It takes a lot of careful consideration and planning, you’re going to need advise or you could be living under a cloud of regret and disappointment for the life of the franchise contract.
Besides getting professional advice, there are some red flags that should go up in your heads when you consider a concept or system attractive enough to invest in.
We asked Jeff Lefler, CEO of Franchise Grade to give us some warning signs potential franchisees should look out for before jumping into a franchise concept or system. Lefler has 15 years of small business experience, 10 of those in franchising.
His company looks out for and provides franchise investors the opportunity to grade
three comparative franchise systems as part of their due diligence. He provides  research, assessment, grading and reporting services across North America. The company is somewhat like “franchise police†so to speak.Here are some red flags he says potential franchisees should be on the look out for.
Communication Restrictions or lack of transparency
The best asset you can get is to actually talk to other franchisees. What you’ll find is that some franchise systems do not allow their franchisees to talk to others within the system without approval from the franchisors. That’s a red flag. If they’re not allowed to share their business experience, not the proprietary workings of the franchise but just general questions. Things like how they like the franchise system, are they making money or are they satisfied, if they can’t answer those basic questions obviously that raises concerns.
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Reluctance from a franchisee to repeat the experience
Make sure you ask as many franchisees as possible, if they would do it again. Would they recommend this investment to their family. Would they recommend it to their friends. That’s important. Based on our research we ask both questions to franchisees. So what we ask is, “Given what you know now, would you invest in this system again?” And the second question is, “Given what you know now will you recommend this investment to your family and friends?”
What we find is that there is a higher positive response for giving what you know now, would you invest again and a lower positive response or a negative response to given what you know now, would you recommend to family or friends? So we find that franchisees who have gone through the business are unwilling to have family or friends go through the same experience.
Both questions are important to ask because it tells a lot about the system or the value of the system.
Report Card on Franchisor Employees and Executives
One warning sign in this regard would past experience of the executives within a franchise system. Be it the CEO or CFO, any vice presidents of franchise development, what past experience do they have and what are the systems they have worked at prior to this one? And is the system still growing or did the system get better after they left in terms of money or franchisee satisfaction? Just following the executive mindset can be critical to predicting the future or direction of the franchise relative to relationship in particular.
Social Media Sentiment
On Twitter, Facebook or Instagram. What kind of information do you find? Are consumers tweeting about how great the brand is? Or are there a lot of complaints about the brand? How are the online reviews about the brand? For franchise systems or concepts, looking at reviews for one location isn’t necessarily valuable, unless you are buying that location. No matter your relationship with the franchisor, consumers have to like the product and buy the product and they need to believe that it’s a great experience. If they are seeing a lot of social sentiment around the brand, that’s a red flag. You’ll have to find out what’s creating all the negativity and the bad sentiments.