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DANGER SIGNALS

by Simon Lord,
last updated 13/02/2017

in this article:

We list the warning signs to look out for when choosing a franchise

The statistics show that franchising is generally a low-risk way of getting into business for yourself. But not all franchises are created equal. Some businesses claim to be franchises when in reality they offer little or no training, support or systems. Others which you see advertised in the papers, on the internet or at expo's are inadequately developed or are close to being scams. Here are some of the danger signals - if you experience any of them, proceed only with extreme caution.

  • The ‘franchise' has no operation already running to prove that it works in practice.
  • The offer suggests you can make a lot of money for very little work.
  • You answer an advert for a job vacancy which turns out to require your own investment in an opportunity.
  • The opportunity makes more money from recruiting sub-franchisees than from operating the business.
  • The opportunity sells you the equipment to manufacture product or carry out a service without proof of the demand for it.
  • The business depends for its success on an advertising campaign which cannot take place until all the franchises have been sold.
  • There is no adequate explanation of the reasoning behind any claims made for potential profitability or income in New Zealand.
  • The franchisor is more interested in selling you the business than finding out whether you have the experience and ability to run it.
  • The franchisor will only give you the details of selected franchisees to talk to.
  • You have only met the franchisor in a hotel and there is no operating entity in New Zealand.
  • You are put under pressure to sign up now rather than lose the territory of your choice.
  • You are not given time to carry out due diligence on a company before making a decision.
  • The franchisor does not see the need for you to consult a lawyer and an accountant.
  • The franchisor wants to take a credit card impression for a deposit payment promising not to use it unless you confirm you wish to proceed.
  • Previous franchisees have failed and you are given no satisfactory explanation why.
  • The contract allows the franchisor to terminate without cause.
  • There are unreasonable restrictions on who you can buy goods from, or how much you must buy, or at what price.
  • The initial franchise fee is higher than can be justified.

If you are looking at buying a franchise, take your time, do your research (see the list of 250 Questions to Ask Your Franchisor) and above all, do take professional advice from a lawyer and an accountant - preferably those with some experience with franchises. A good franchisor will not only allow you time to do this but will actively help and encourage you to ensure you are making an informed decision.

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