How to Spot a Franchise Scam - Items To Watch Out For

Buying a new franchise is an excellent way to own a successful business.  However, like everything else in life, while searching for the right franchise for you to buy you need to be on the lookout for potential scams when buying a business.

Avoiding a franchise scam is the best defense against losing your investment to an unscrupulous franchisor.  Here are some red flags that may indicate you are dealing with a potential scam artist:

1. The franchisor promises exorbitant returns. Responsible franchisors do not guarantee specific rates of return because they realize your success depends in a very large part upon your commitment to your own success.  Any franchisor that says you will have guaranteed success should be eyed with suspicion.  All they can do is tell you how well their system has worked for other franchisors, and if you follow the system to a “T” then you should experience similar results.  This is honest and upfront, and should be the extent of any guarantee you receive from any franchisor.

2. The franchisor claims 100% of their franchisees are satisfied 100% of the time.  Even the most successful franchise systems experience problems at some time.  Remember the old adage: if it looks too good to be true, then it probably is.

3. The franchisor uses high-pressure sales tactics to convince you to buy their franchise.  Often times a franchisor wants to pressure you through the sales process if they have something to hide and don’t want you to find out about it.  Take your time and conduct your full due diligence; any reputable franchisor will certainly understand and respect your decision.

4. If the franchisor gives evasive answers to your questions.  When you ask standard questions related to the franchise, the franchisor should be able to immediately be able to give you direct and straight-forward answers.  Or at a minimum, they should be willing to find the answer for you if they don’t know it. If the franchisor doesn’t, then the alarm in your head should start ringing and you should seriously consider a different franchise.

5. Steep franchise fees the franchisor can justify.  Typically, a franchisor’s upfront fees are designed to cover their costs of recruiting new franchisors and helping them establish their franchise.  The fees should not represent the franchisor’s primary method of generating a profit; this profit should come from back-end royalties generated by successful franchisees in the franchisor’s system.  If the majority of a franchisor’s revenues come from the franchise fee, this should be a glowing red flag.  (Note, however, that business opportunities are completely different.  Nearly 100% of their revenues and profits are generated from their upfront fee because you do not have to pay them an on-going royalty on future revenues.

About The Author - Peter Siegel is the founder and President of BizBen.com - Businesses For Sale In California. A nationally recognized author (3 books and a syndicated small business blog) and expert consultant. If you are selling a business and need professional assistance utilizing high performance advertising, marketing, and highly effective strategies, or individual customization with your BizBen Power Search options in buying a California business, you can reach him at 866-270-6278.

Categories: BizBen Blog Contributor, Franchises For Sale