For many, owning your own business is a dream. You get the opportunity to lead a team, boost your community and build wealth for your future generations. When starting a whole business from scratch feels like an impossible feat, purchasing a well-established franchise can feel like a safer investment alternative. You can rely on their brand recognition and their standard operating procedures to guide you as you take on this exciting venture.
What many prospective franchisees don’t realize, however, is that there is a high potential for fraud within franchise transactions. This is because one of the biggest sources of profit for franchisors is the selling of franchises. They garner this profit by charging a franchise fee upfront and locking you into a contract with little concern for whether or not you succeed. In fact, they may benefit more if you do not succeed in turning a profit because then they can sell the franchise again.
Some red flags and where you can find them
One of the documents you will need to sign as part of your franchise agreement is the franchise disclosure document. A careful review of this document, and item 20 in particular, is an important way to avoid becoming a victim of franchise fraud. Some important things to consider:
- What is the turnover rate for this franchise?
- What are the primary reasons for turnover?
- Are you able to contact current and former franchisees?
- Does the franchisor require confidentiality agreements?
While these are only some of the investigative questions you should ask, this list is not at all exhaustive. Keep in mind that if a franchisor intends to trap you into a contract with little regard for your success, it is likely that they will attempt to obscure important information from your view. Having an attorney review the contract and disclosure documents may help you avoid losing your investment money to a sunk opportunity.
NOTICE: This blog is intended solely for informational purposes and should not be construed as providing legal advice. Please feel free to contact us with any questions you may have regarding this blog post.