Franchise scams to avoid when buying a franchise
There are literally hundreds of businesses in Australia that call themselves franchise opportunities, but not all actual franchises. You need to know what makes a franchise a franchise, and be able to sift through franchises opportunities and spot a good franchise from a bad franchise.
A good starting point would be to look at those franchise opportunities who are members of the Franchise Council of Australia; this is the body for the Australian franchise sector.
A good franchise will tell all. They may have imperfections and may have made mistakes at the start but will have worked hard to overcome these. Franchising is about the franchisor trying and testing the business model before franchising it out. They are committed to growing the business through franchising.
If someone tells you that their franchise is perfect and always has been then i would be wary.
I would equally have alarm bells ringing if they tell you that they can make you rich over night. An ethical franchisor will not make promises to earnings but may give you predictions based on other franchisees in the network; they will manage your expectations.
Also, a good franchisor will allow you to make a decision in your own time as to whether to buy their franchise opportunity or not. Buying a franchise is a massive decision and require a lot of due diligence and so you should never feel pushed into making a decision. If they are pushing you then it is likely that they do not want you spending time to find out the company, and so may have something to hide. If you feel pressure at any time to make a decision, then walk away.
You should also be wary of any special offers. A good franchise should speak for itself with no fancy promotional deals required to sell it.
A franchisor should also be able to answer any questions you have about the business as they should know it inside out. If they cannot answer immediately, they should get be keen to get back to ASAP with answer.
There is nothing wrong with being a new franchise; everyone had to start at the beginning, including the likes of McDonalds and Dominos. And so a new franchisor should never try to cover up this by offering instead exaggerated information on profits. You will find the con artists will be more intent on telling you how wonderful the business is and how much money it can make you.
Though businesses can be new to franchising, they should however have a track record of running the business. Franchising is not about making a business successful, but about expanding a ready successful business. Businesses can only be tested if they have been operating in their market for several years. Be extremely wary of any business that cannot provide evidence of a track record or who has been franchising for the same time as they have existed! They cannot run a successful franchise if they have not proven it can be run successfully as a business. Also avoid any who have no company owned outlets as this is a franchise scam.
Franchisors should be able to back up what they are asking for in investment/fees with what you get in return. More established franchisors will tend to have higher fees as they will tend to offer more and have greater public acceptance and awareness. Be wary of those who ask for a high investment upfront but have no track record to back it up or do not offer much in return. They are just looking to make a lot of money fast.
Your franchise fee should cover support. A good franchisor will be able to offer a dedicated and comprehensive support system from a team of experts in their field. Be wary if this is limited or nonexistent.
A good franchisor will also give you a full list of their franchisees. They will have nothing to hide and should be happy for you to chat to any of them. Most franchises will those who are doing exceptionally well and those not so well. There is usually a reasonable explanation for why some are not doing as well. A bad “franchisor” will only give you a list of a couple of people to speak to which you can bet will be their most successful franchisees. You should also be told how many have left the system.
Another good indicator of finding out about which franchises are reputable is to talk to your bank. Most banks have a dedicated franchise department and so if you are looking for a loan from them, the amount they will offer will depend on how they rate a franchise. Banks want to get their money back and so will only lend on a franchise that is profitable. Even if you have the money in place, it is still worthwhile talking to the bank and even enquiring about how much money you could get if you needed a loan.
If a franchisor broker is involved in the process, you still be given the opportunity to speak to the franchisor face-to-face during the process and not the broker or sales staff. If the broker does not allow this then walk away.
We cannot emphasise enough that you need to do your homework and make sure that you 100% sure on the franchise. Do not buy into a franchise that you are wary of as there is probably a good reason for this.