Franchising & You

by Simon Lord

last updated 22/06/2020

Danger Signals

by Simon Lord

last updated 22/06/2020

Beware – some business opportunities may not be all they seem

While genuine franchises offer a low-risk way of getting into business for yourself, you need to watch out for the others. Some companies claim to offer ‘franchises’ or ‘business opportunities’ when in reality they offer little or no training, support or systems. Some may be scams, or disguised multi-level marketing schemes with little real opportunity for growth. 

Here are some warning signs you should be aware of. If you come across any of these, be very, very careful – and don’t sign anything until you’ve had time to check the ‘opportunity’ out fully (our list of 250 Questions to Ask should make any dodgy operator run a mile).

  • The ‘franchise’ has no operation already running in New Zealand to prove that it works in practice (we’d suggest looking for a minimum of 12 months so that any seasonal variations are obvious).
  • The offer suggests you can make a lot of money for very little work.
  • The opportunity makes more money from recruiting other people 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 that 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 initial franchise fee is higher than can be justified.
  • The franchisor is more interested in selling you the business than finding out whether you have the experience and ability to run it.
  • You have only met the franchisor in a hotel and there is no operating entity in New Zealand. 
  • There are unreasonable restrictions on who you can buy goods from, or how much you must buy, or at what price. 
  • 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.
  • There is no ‘cooling-off’ period allowed after signing.
  • The franchisor does not see the need for you to consult a lawyer and an accountant.
  • The franchisor wants to take your credit card details for a deposit payment, promising not to use it unless you confirm you wish to proceed.
  • Previous franchisees have closed or failed and you are given no satisfactory explanation why.
  • The contract allows the franchisor to terminate without cause.

Being aware of these danger signs should help you to avoid being taken for a ride. However, it’s still up to you to ensure that the franchise you choose is a genuine opportunity that will be a good match for your interests, skills, financial resources and expectations.

A good franchisor will not only allow you time to do this – they will insist that you take professional advice from a lawyer and an accountant (preferably franchise-experienced) and will actively encourage you to make an informed decision. 

The best franchises succeed not because they do the hard sell but because they take the time to appoint the right people. It’s your life and your money, so make sure you take care.

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