Franchise Experts Share Common Pitfalls to Avoid in Franchise Investments
Not all franchise brands are created equally. Like anything else, there are standouts and underperformers. In franchising, some brands excel with strong systems and support, while others fall short.
As more individuals seek franchise ownership as a path to financial independence, the stakes have never been higher. For many first-time buyers, investing in a franchise represents a significant commitment, often involving their entire life savings. According to the International Franchise Association’s 2024 Economic Outlook, over 15,000 new franchise units are expected to open this year. But will they all succeed?
The key is knowing how to spot the brands that deliver value and lasting support. So, how do you find the winners and identify the losers? It all starts with due diligence. One of the most insightful steps in this process is validation, where you can speak with current franchise owners about their experiences with the franchisor.
It’s important to enter a franchise investment with eyes wide open, take the time to ask the right questions, and, most of all, trust your gut. An article in Harvard Business Review suggests that combining gut feelings with analytical thinking leads to better, faster, and more accurate decisions than just logic alone. In other words, if something doesn’t seem right, it probably isn’t.
That said, there are specific red flags to watch for when evaluating a franchise opportunity. We asked franchise thought leaders to share their insights and experience, and many suggested careful scrutiny of the Franchise Disclosure Document (FDD) and thorough due diligence. Here’s what they had to say:
Bottom Row, from left to right: Jennifer Lucas, Stacey Heald, Aaron Harper
Jamie Davis, ApplePie Capital
“Here’s my red flag avoidance FDD review strategy: Look at Item 3 first. A franchisor’s litigation status can be a barometer for the brand’s culture and relationships with its franchisees. Then skip to Item 20 and look closely at their openings, closings, the difference between agreements sold and not open, and what they expect to open in the next 12 months. Are they opening locations and keeping them open?” —Jamie Davis
Justin Waltz, The Junkluggers
“When evaluating a franchise brand, potential franchise owners should watch for red flags such as excessive initial franchising fees or royalties, high franchise owner turnover, widespread dissatisfaction among franchise owners, and a lack of transparency or consistent communication from the parent company. Legitimate franchisors should be able to provide clear, detailed financial information to demonstrate how they generate revenue and reinvest in the business to enhance the franchise owner experience. Connecting with current and former franchise owners or reviewing online forums can help prospective franchise owners determine if a brand is right for them.” —Justin Waltz
Jake Feury, Stretch Recovery Lounge
“When looking for a franchise to invest in, it is important to ensure that you find a franchisor who cares about your success even more than their own. Franchising is all about teamwork, and you need to find a franchisor who is willing to do their part.” —Jake Feury
John Rabiner, Prime Site Construction & Advisory
“The connection between being a successful franchisee and having a real estate strategy is inseparable for four-wall brands. Having a strong, data-driven conviction on where to locate new stores and how to build new storefronts ensures that businesses are playing offense instead of defense.” —John Rabiner
Jennifer Lucas, The Franchising Company
“Buying a franchise may be one of the largest financial investments you make, and it’s certainly a commitment you shouldn’t take lightly. Discovering red flags within a franchise brand early is the key to avoiding pitfalls and assessing the potential for success. Five glaring red flags are: unhappy franchisees, high franchisee turnover, a lengthy litigation history, consistent negative feedback and unrealistic financial projections.” —Jennifer Lucas
Stacey Heald, Pvolve
“Responsible franchisors understand the importance of providing robust support systems for their franchisees. This includes comprehensive training programs, ongoing operational support, marketing support, and access to marketing resources. Look for a dedicated team that stays current with industry trends, researches regulations and requirements and sources products and services to benefit the franchise system. Franchise support provides coaching on key performance indicators and best practices, helps franchisees navigate challenges and celebrates their successes. This level of support not only boosts confidence for new business owners but also significantly increases their chances of success.” —Stacey Heald
Aaron Harper, Rolling Suds
“There are many red flags to look out for when identifying lucrative franchise opportunities. One red flag is a lack of comprehensive training and ongoing support to franchisees, alongside unrealistic promises of profitability. Sometimes, franchises scale at an irresponsible rate, leading to franchisees buying into a dream that may not be realistic for them if they don’t fully understand the commitment required. This lack of transparency and support can lead to high turnover rates among franchisees and operational inconsistencies across locations, jeopardizing the overall brand reputation and franchisee success. Other red flags include a lack of transparency in financial disclosures, unhappy franchisees, compliance issues or unresolved legal disputes.” —Aaron Harper
