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Posted on Apr 01, 2011

Beware of Franchise Scams

Avoid Franchise ScamsAfter decades of regulations, the dangers of being trapped in a franchise scam are still all too real for many people. While there are established standards and regulations in place, it is still up to the prospective franchisees to conduct the necessary research to protect themselves from fraudulent franchises.

Prospects must do their due diligence before committing their hard-earned money to a franchise opportunity. There are so many systems available for various budgets and there is absolutely no reason to settle for anything less than the very best. One of the most valuable research tools available to prospective franchisees is the Franchise Disclosure Document (also known as the FDD). Every franchisor is required, by law, to provide their prospective franchisees with this document, but they often wait until nearly the last possible minute to do so; if you are deciding between multiple investment opportunities it often makes sense to invest in buying the FDDs for your top franchise choices (or even their competitors), just to be sure you have all the information at hand to make an informed decision. Spending a few hundred up front could save you hundreds of thousands a few months down the road. (See's guide to understanding the Franchise Disclosure Document for more information.)

The internet is the easiest way to do research these days and while it contains a wealth of information, caution should still prevail when using it to find a franchise to invest in. You simply can’t believe everything you see or read online, so you must make sure you are using a trusted source. With the ease of self-broadcasting and self-publishing, anyone with basic skills and a computer can publish what they like, without any regulation. You need to use your best judgment, do your research, and it never hurts to talk to other franchisees within the system to find out what they think.

A franchise is only as good as its brand name, which eventually determines the performance and success of other franchisees within the system. Aside from happy franchisees and a strong brand, another indicator of a strong franchise is one that utilizes a broad recruitment process, which at some point replaces the selling process so only the best prospects gain entry into the system.

So what should you do to avoid a franchise scam?

There are a number of critical areas that, through careful analysis, can help you detect one:

1.    Years of experience in the business: When you’re looking for signs of a spurious or inept franchise, one of the key indicators is the number of years the company spent in the business before entering the franchise industry. I spent years coaching businesses before I went into franchising. I have personally invested millions of dollars into establishing and perfecting the systems of my franchise. Unfortunately, many franchise companies venture into franchising before getting into the business they are in. They are incompetent with flawed systems and many franchisees are getting ripped off by such companies.

2.    Experience of the management team and how it supports franchisees: Don’t invest in a franchise with an inexperienced team. Each member on my team at ActionCOACH has a good understanding of not only the business coaching industry but also of franchising. It is also a good idea to call franchisees and see what they think of the management team and also find out what type of support they will provide you.

3.    The financial condition of the company: Needless to say, the financial health of the franchise is vital in your decision-making process.

4.    Can they justify the franchise fees? Prospects looking to invest in a recognized brand with thriving franchisees should be prepared to pay a hefty franchise fee. In order to determine if the fees are acceptable, we encourage prospects to ask existing franchisees if they are getting value for their buck.

5.    The franchisor’s litigation history: Litigation is the cruel reality of doing business. Most companies having some type of legal action by or against them, so it is essential for potential franchisees to closely scrutinize these cases, which should be disclosed in the FDD.

6.    Awards by recognized institutions: The franchise industry has become so popular, that there are several reputable organizations that award franchises based upon their financial viability, training and support, systems maturity. An award-winning franchise seems to be a good indicator of an honest and successful franchise system.

Brad Sugars is the Founder, Chairman and President of ActionCOACH, the world’s number one business coaching and executive coaching firm, with more than 1,000 offices in 32 countries. ActionCOACH specializes in coaching small to medium size business as well as executive teams and group coaching. You can follow Brad on Facebook and Twitter.

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