If you are thinking about investing in a franchise you should keep the adage, “if it sounds too good to be true – generally it is” in mind when investigating franchise opportunities.
Statistics often claim, quite rightly so, that when purchasing a franchise, you are more likely to find greater success than going into business as an independent. Whereas independent businesses have a 90% chance of failure in the first five years, franchise failure is under 10%. However, the buyer must remember that there are always risks involved, and that they can reduce them if proper homework is done.
Our advice to prospective franchisees is to make FASA their first port-of-call when shopping around for a franchise. At the very least they will know that FASA members subscribe to a stringent Code of Ethics that promotes ethical business format franchising practices.
Tell-tale signs of ‘fly-by-night’ franchisors
- Try hard to sell, telling you there is a queue of prospective franchisees and urging you to conclude the deal immediately.
- Want money up front or as much as possible as soon as possible without allowing you the mandatory 10-day cooling off period for scrutiny and consultation.
- Will try and collect deposits or upfront fee before conducting proper interviews and profile testing.
- If the franchise is very cheap, it may not have long-term substance.
- If the franchise has a heavy initial franchise fee or whose on-going management fee is too low to support the service they should provide.
- Trying to sell a passing fad without being market-tested.
- Beware of businesses that offer you what seems to be a franchise but is often pyramid-type schemes.
- Reluctance to supply information, especially with regards the franchise company history, details of directors, experience or financial disclosure as required by the Consumer Protection Act.
- Will have a weak, incomplete or non existent franchise package.
- Contracts that do not match promises, are either inadequate, vague and lacking in detail or onerously complicated.
- Not being able to supply comprehensive financial details on performance, i.e. turnover and viability of stores.
- Will have no pilot operation.
- Non-existent or untraceable franchisees.
- Franchisees who are not happy with their franchisor, his business methods and who are not profitable.
- Will never meet you at his offices – an indication he has no infrastructure.
- Franchisors who run their franchise operations as a part time business are often suspect.
- Will give you flexibility to do your own thing and select your own site.
- Will have a limited training programme.
- Offers non-existent or minimal back-up.
- Will not spend time checking your credentials.
- Be extra careful buying a franchise from a business broker – they’re often only interested in the sale and not the long-term success of the business.
For more information and questions please refer to the Franchise Help Desk.
To protect, lobby, promote and develop ethical franchising across all sectors in South Africa with specific focus on transformation.