Five Characteristics of a Bad Franchise
I am often asked how someone would know if a franchise is a good one. There are some clear signs and characteristics of a bad franchise that can be helpful. Here are five examples of characteristics of a bad franchise that a prospective franchisee should consider.
1. NO SUPPORT FROM THE FRANCHISOR
If the franchisor provides little to no support to its franchisees it is likely not a good franchise in which to invest. A good franchisor should provide support to its franchisees in working with a local realtor in finding a good location for the business and negotiating favorable business terms to a lease. Additionally, in addition to strong training of the franchisees, support in product selection, grand opening, training of employees, and on-going support for employment and operational matters, are the characteristics of a good franchisor.
2. NO TERRITORY PROTECTION
What is defined as the territory? Is it just a zip code and the franchisor can flood the area with locations on every corner? This is another characteristic of a bad franchise. The protected territory assigned to a franchisee should be broad enough so that there isn’t competition from other franchisees that can draw away customers to your business. A fitness franchise of a few years ago is a good example of this characteristic. Their territory was defined by zip codes. Literally you could have a franchisee with a location in a shopping center on one block and another franchisee with a location across the street if they were different zip codes. This was one of the only franchise systems I would tell people was a bad franchise and in which they should walk away. This franchise provided little support to their franchisees and forced franchisees to compete against each other by allowing locations that were too close together.
3. FRANCHISOR MARKETS DIRECTLY TO YOUR CUSTOMERS
Another characteristic of a bad franchise is when the franchisor markets directly to your customers. A mailing and shipping franchise does this and has been sued by numerous franchisees. Imagine having your franchised business location near a franchisor’s shipping depot. The franchisor’s depot handles a lot of the same work that your store handles. If the franchisor markets directly to your customer base, why would the customers continue to go to your store? Obviously this impacts the franchisee’s bottom line.
4. FRANCHISOR ACCEPTS EVERYONE
If a franchisor has no standards, financial requirements, character requirements, etc., this is often a sign that the franchisor wants to sell franchises quickly to anyone and is more interested in that than creating a successful franchise system. This is another characteristic of a bad franchise. Sometime growth that is too rapid means that the franchisor has loose or no standards for accepting a franchisee and is anxious to flood the market with its brand and products more than create a good franchise system. The result is often a system filled with franchisees who do not have the financial strength or moral and ethical character to succeed or to benefit the brand. This hurts everyone. I recently heard of a fitness franchise that sold approximately 300 franchises in a little over a year. Prospective franchisees thought that was a sign that the franchise was successful. However, I then learned that the franchisees could not find good locations to open nor were they doing well because the franchisor did not have the support system and staffing in place to help the franchisees succeed. Many of these that did open are now closing and many of those that did not find locations are just walking away.
5. NO SYSTEM STANDARDS OR ENFORCEMENT
When a franchisor does not oversee that its standards or requirements are being met, or does not enforce the standards, franchisees will often take advantage of that, which can harm all the other franchisees and the brand. Several years ago a national chain of frozen dessert franchises was not enforcing system standards around the country. As a result, a customer could go to one location and have a wonderful experience and go to another in the next town and find the product diluted and watered down. This creates an issue for all franchisees as it harms the reputation of the product and the brand. A good franchise system is careful to protect the brand and enforce system standards.
There are other characteristics of a bad franchise and ways to protect yourself from investing in one. For more information consider reviewing my prior Blog Four StepsTo Validate A Franchise.