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Let the Buyer Beware
The old adage, “A fool and his money are soon parted,” is never more appropriate than for people who are looking to buy a franchise.  There are literally thousands of business opportunities out there for an entrepreneur who wants to own a business.  But as with any situation that involves spending money, there are always a few bad apples waiting to separate you from your cash.  By doing plenty of research ahead of time—and by keeping an eye out for some telltale warning signs—you will protect yourself, your investors (if you have some), and your financial future.

A String of Bad Players
Every day your e-mail inbox is chock-full of fake business deals—with work-at-home schemes and financial processing dodges just a few examples among many.  You’re unlikely to send money via Western Union to someone in the Ivory Coast based on the expectation of sharing a US$20 million windfall.  If that’s the case, why not approach a potential franchise purchase with the same level of healthy skepticism?  Even companies that appear to be a well-known brand name could be less than legitimate.  The benign-sounding Pizza One out of Canada—the fraudster also used the name “Anthony’s Kitchen” in the States—notoriously took as much as $50,000 from a number of prospective franchisees without delivering so much as a double-pepperoni with cheese.  Do a Web search on the phrase “franchise scam” to find more than 6,000 entries in a wide variety of industries.

Eliminate the Middleman
While independent brokers can be a legitimate source for people who wish to buy a franchise—they can help you narrow the field to a few likely candidates, assist in locating capital, and even walk you through the daunting paperwork process—paying someone in advance to do this sort of work is not always a good idea.  By researching franchise opportunities on your own, you can be sure of the results without relying on some else’s say-so.  After all, it’s not an impossible scenario to imagine that a “broker” could be in collusion with a fake franchise operator.

Weighing the Options
If you are working directly with the parent company of a major U.S. corporation, you should feel extremely confident in their ability to deliver as promised.  There is no chance that McDonald’s would take your franchise fee and disappear overnight without a trace.  But not everyone has half a million dollars or more to sink into that kind of venture.  In a perverse way, the less you can afford to pay for a franchise, the more vulnerable you might be to a franchise scam.

Raise the Red Flag
When examining various franchise opportunities, keep your eyes peeled for one or more of these “red flag” factors.

• Does the company have any franchises up and running, or would you be among the first?  Assuming some franchises actually exist, meet them in person rather than relying on the parent company to “put you in touch” with them.
• Is the company truly making money?  Some corporations are solvent only because they have boosted their earnings picture by collecting franchise fees.  You want to buy a franchise that is successful in its own right, not simply a Ponzi scheme.
• Is the company hiding something?  Only 12 U.S. states require franchisors to register their offerings before being allowed to operate there legally.  If the parent company specifically avoids doing business in those 12 states, it could mean their franchise opportunity would not meet regulatory standards.
• Are there stringent rules for accepting franchise applications?  Legitimate operations will ask you to provide tons of documentation before agreeing to sell you a franchise—wanting to know your financial health, previous business experience, knowledge of the industry in which the franchise operates, and so on.  If all they seem to care about is getting your signature on an agreement and a check in their hands, watch out!

Little Knowledge, Bad—Much Knowledge, Good!
Let’s close with another timeworn but highly accurate saying.  “If it sounds too good to be true, it probably is.”  Before ever paying a dime in franchise fees, or even a down payment, make sure you have done your homework.  Look for negative publicity online—or an absence of any information, which should be a huge warning bell—and contact the Better Business Bureau office in the city where the parent company is based, examine SEC filings (if the company is publicly owned), and talk extensively to existing franchise operators.  Owning a franchise can be the best financial move you will ever make.  Don’t let a scam rob you of that opportunity.

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