As a prospective franchisee, there are lots of red flags to be aware of during the due diligence process. These include incomplete FDD disclosures, evasiveness from the franchisor’s representatives, and franchisees who are hesitant to talk about their experience, among others. By working with an experienced franchisee attorney during your due diligence, you can spot these red flags before you make an uninformed buying decision.
When buying a franchise, informed decision-making is critical. You need to choose a franchise opportunity that gives you a reasonable chance of success; and, when you commit to moving forward, you need to be reasonably confident that you are not setting yourself up for issues that could—and should—have been avoided.
Avoiding unnecessary issues as a prospective franchisee involves conducting thorough due diligence. Among other things, this includes identifying potential red flags. An experienced franchisee attorney will be able to use his or her experience to help you identify red flags that most prospective franchisees would not be able to identify on their own.
What Are Some Red Flags to Be Aware of When Buying a Franchise?
There are several red flags to watch for when buying a franchise. These include red flags related to the franchisor, the franchise system, and the franchise concept itself. Some examples include:
1. Incomplete FDD Disclosures
Franchisors must strictly comply with the disclosure requirements established in the Federal Trade Commission’s (FTC) franchise regulations. These requirements are intended to help ensure that prospective franchisees have access to the information they need to make informed buying decisions.
As a result, incomplete disclosures in a franchisor’s Franchise Disclosure Document (FDD) can be a major red flag. Not only can they signify an inadequate commitment to compliance, but they can also raise questions about why a franchisor has chosen not to make mandatory disclosures.
2. Evasiveness from the Franchisor’s Representatives
If a franchisor’s representatives are evasive when you ask questions about the franchise system, this can also be a major red flag. Generally speaking, a franchisor’s representatives should be willing to tell you anything you want to know. If they are unwilling to tell you anything you want to know, it suggests they may be hiding information material to your franchise-buying decision.
3. Franchisees Who Are Hesitant to Talk About Their Experience
Franchisees should feel free to speak with you about their experience, and most existing franchisees will be more than happy to share their insights with prospective buyers. As a result, if a franchisor’s current franchisees are hesitant to speak with you, this can be a red flag as well. This is especially true if you notice a recurring theme during your due diligence.
4. A History of Complaints or Litigation (or Both)
While franchisors will inevitably receive complaints over time, these complaints should be far outweighed by a franchisor’s positive feedback. If complaints against a franchisor are not outweighed by positive feedback—or if a franchisor has a history of complaints leading to litigation—this is another factor you will want to carefully consider when making your buying decision. You should be able to see if a franchisor has a history of litigation in Item 3 of its Franchise Disclosure Document (FDD).
5. Unreasonable Franchise Agreement Terms
If the terms of a franchisor’s franchise agreement are unreasonable, this can potentially have a variety of negative implications. One possible negative implication is that the franchisor uses its leverage to take advantage of its franchisees. Another possible negative implication is that the franchisor relies on the terms of its agreement to enforce compliance aggressively. Either way, this is another factor to consider carefully when deciding whether to move forward.
Again, these are just examples. There are many more factors to consider when buying a franchise, and when performing your due diligence, it is critical to ensure you do not overlook any issues that could derail your investment. Once you engage an experienced franchisee attorney to represent you, your attorney will be able to provide custom-tailored advice based on the specific franchise you have chosen to pursue.
FAQs: Making Informed Decisions When Buying a Franchise
How can I decide if buying a particular franchise is a good investment?
Deciding whether you should invest in a particular franchise requires thorough due diligence and insights from experienced industry professionals. An experienced franchisee attorney can assist with your due diligence and provide important insights into the franchisor’s FDD and franchise agreement.
When should I walk away from a franchise opportunity?
You should walk away from a franchise opportunity if you are not reasonably confident that you can use the franchisor’s system to build a successful business. Buying a franchise is a significant long-term investment, and if you are not confident in a particular franchise opportunity, there are plenty of other opportunities available.
Is it worth hiring a franchisee attorney when buying a franchise?
Hiring an experienced franchisee attorney to help you make an informed buying decision is well worth it. Not only will an experienced attorney be able to provide unique insights during your due diligence, but your attorney will also be able to negotiate the terms of your franchise agreement if you decide to move forward.
How Franchisee Attorney Jeffrey M. Goldstein Can Help
Franchisee attorney Jeffrey M. Goldstein has decades of experience helping prospective franchisees make informed buying decisions. If you are considering a franchise opportunity, he can identify any potential red flags and advise you with your long-term best interests in mind. He can also negotiate the terms of your franchise agreement if desired; and, as you move forward with your franchise opportunity, he will remain available to answer any questions you may have.
Buying a Franchise? Contact Us for a Free Initial Consultation
To speak with franchisee attorney Jeffrey M. Goldstein about your franchise opportunity, contact us today. Call 202-293-3947 or tell us how we can reach you online to arrange a free initial consultation.
