Franchise Red Flags You Shouldn’t Ignore (Even If You Love The Brand)

So, you’ve found a franchising opportunity you like. They move in an industry you’ve always wanted to be a part of. They have a product and a brand that you feel that you can run with. It feels like you’ll be part of a family when you join their system.

It can be truly inspiring when you find an opportunity that excites you, but with that said, it’s also important to pinch yourself. No matter how much you like a brand or find what they do intriguing, you also need to be sure you’re equipping yourself with and weighing the right information. This will likely be one of the biggest investments of your life, and you need to be sure you’re making the right decision, not just rushing towards something that excites you.

Under the FTC’s Franchise Rule, it’s every franchisor’s responsibility to provide potential franchisees with a complete franchise disclosure document (FDD) that provides information on 23 key items related to their opportunity. Those items range in scope from providing basic information about the company and its structure, start-up costs, obligations between franchisor and franchisee, how disputes will be resolved, and beyond.

Before you sign an agreement with any brand, it’s crucial that you fully understand and are completely comfortable with all 23 of those items at an absolute minimum. If you have questions, it’s important to ask the broker or development professionals you’re working with, but it’s also key to do some research of your own first so you can hold them accountable in their answers.

The ability for entrepreneurs and franchise candidates to conduct their own research into brands using tools like AI has turned the tables in recent years. With the right research and questions prepared, you can protect yourself better than was ever possible before going into your discovery session and throughout your negotiation.

> In ten or fifteen minutes, a candidate can now know more about a franchise company than they would have learned spending three months in that franchise company’s discovery process just a few years ago… If [brands] want to work with the best franchise candidates, [they] have to be prepared to answer to someone who’s asking rigorous questions and has access to tools that mean their perception of an opportunity is no longer exclusively influenced by a recruiter, broker, or salesperson.

If a development team can’t answer your question about any of the 23 standard items on their FDD, back away confidently.

At the end of the day, franchising is a business. The numbers on the franchise disclosure document may not be everything, but they are the bottom line. When a franchisor is selling you an opportunity and their pitch is focused on things outside the FDD, like their brand or tradition or culture, that can be a warning sign.

Brands with great unit economics lead with their unit economics. If a company’s development team keeps steering the conversation away from quantifiables and back toward more conceptual or “vibes-based” discussion of the opportunity, it often means they aren’t confident in their ability to present the numbers – or they aren’t confident in the numbers.

Either way, if you want to come to the table as a discerning potential owner, it’s crucial that you put your most business-minded foot forward and hold the brand you’re talking to accountable for doing the same. If they want to talk about everything but the numbers, is it really a business opportunity?

That’s not to say culture and brand and related concerns are unimportant – on the contrary – but they shouldn’t ever be used as a shield to prevent a serious conversation about performance and support across a franchise system.

If you feel like a broker, salesperson, or development team member is rushing you or putting pressure on you to put pen to paper, that’s a sign you should be hitting the brakes, not the gas. At the end of the day, it’s your investment and their job to make you feel as comfortable as possible making that investment.

Here’s a crucial piece of advice from The Informed Franchisee herself, Jennifer Gonzalez: “Take your time and seek insight from unbiased sources and professionals. A franchise purchase is too significant to rush because of a sales timeline, expiring incentive, training date, or fear of losing a territory.”

As a potential franchisee, you’re hoping to build a thriving, long-term relationship with the right brand. The right brand will see it that way too. With that said, there are franchise systems that are focused primarily on growth through selling territories, with an emphasis on the “selling” part.

“At the end of the day, a successful franchise system isn’t built simply by selling more franchises. It’s built by creating successful franchisees. When everyone is working toward that shared goal, the entire system becomes stronger,” says Gonzalez.

If you get the feeling that a franchise development team sees you as a deal and not a long-term partner, you should trust your gut. Even if you have to walk away from a brand or product that you love, every entrepreneur deserves to work with a partner that respects their diligence, thoughtfulness, and commitment to getting things right.

Of course, these aren’t the only red flags that a franchisor can wave at you. Some other issues to be sure to think about include…

• They’re fighting current or former franchisees in court

• They say they’re growing and opening units, but Item 20 suggests they’re also shrinking and closing units

• The brand entity doesn’t run enough corporate units to truly understand operations in its own system

• You can’t get a hold of the current franchisees they keep referring you to

• They’re only focused on top-third performance or averages