12 Warning Signs To Look For Before Committing to a Franchising Company

Franchising is an excellent route for a newcomer in a business. With a proven revenue-generating venture, franchising saves the investor time in many ways. From figuring out how to attract the market, determine price points for its products or services to managing resources efficiently, an investor gets the business going quicker. Not to mention that operating a renowned brand that took years to develop already assures of a loyal audience.

In other words, getting into the franchise bandwagon provides answers to many questions a new investor should be asking, and immediately learn what works and what doesn’t work.

No wonder, many Filipinos with adequate capital will make the wise choice of turning to franchises to lay down their investments for a safer, more defined route to success.

Food carts, laundry services, petroleum distribution, or water dispensing businesses are among examples of franchising opportunities available.

Unfortunately, not all franchises have this in mind. Some not only lack a money-making business, but they also lack business ethics and are often only looking to earn out of an investor’s capital outlay. Thankfully, we have identified several characteristics unscrupulous franchise operators share, and you are well-advised to stay away from them.

Incomplete paperwork.

One prominent requirement to operate a business is to obtain all required licenses, accreditation, and permits. This requirement ensures that if something goes wrong, a corresponding agency will be there to assist you. So it’s crucial to verify these types of paperwork. The food supplement business may have cleared requirements with the Bureau of Internal Revenue and registered at the Department of Trade and Industry. But if it does not have a permit from the Bureau of Food and Drugs, its ability to operate is questionable.

Discrepancy in business details.

The company may have duly registered at appropriate government agencies, but if the business is not defined correctly, there’s an inherent problem with its operations. If a fast-food outlet is licensed to sell food, it must apply for a separate license from the Liquor Licensing & Regulatory Board before liquor of sale. Inconsistencies can lead to problems such as insurance claims, assessment of taxable income, and other possible issues.

A franchise owner or representative doesn’t meet prospects in person.

The franchisor prefers a phone call, email, or Facebook messenger communication over personal discussion over salient points and questions by interested prospects.

Franchise business does not issue official receipts.

If the business has no license to operate or staff unauthorized to transact, applicants should be cautious about paying fees if it presents no proof of payment.

The franchise agreement is not detailed enough.

The business provides a document detailing what a franchise entails but not detailed enough. For example, a food stall franchise operator mentions the franchisee will receive a fixed volume of raw materials. But if it does not elaborate details in case situations arise beyond the assumed conditions, the franchisee might end up spending more or curtail its operations. For example, does the supplier continue to offer the same price if the franchisee places extra raw material orders?

The sales manager does not give you a reasonable amount of time to evaluate the business proposal.

If a franchise offer expires sooner than you’d hope for, a representative of the company might urge you to sign up urgently to seal the deal. He or she may use shallow reasoning such as the imminent increase in franchise fee or apparent limits in slots available. As with any other business offer that involves a substantial amount of investment money, thorough research before making a decision is a critical step. Rushing things out could lead to costly repercussions in the future.

Franchise business has no permanent address.

If you check their business address, you might wonder this business often move from one place to another. An established business is expected to hold office at a particular address, as it reflects in its business permit. Otherwise, the business may not be licensed to operate. With no permanent address to call its own, it will be difficult to chase the company in cases of conflicts arising from the partnerships you may enter later.

The franchisor loosely allows sourcing of materials from external providers.

In its efforts to maintain consistency and high standards in product quality, franchisers — notably in the food business — typically supply their franchisees with products. Other sources that may alter the output and lower the quality of produce are not allowed. When the franchiser allows sourcing of supposedly quality-controlled and carefully screened raw materials, it may be a sign of low regard for its products and welfare of its franchisees.

The company includes irrelevant products as part of the package.

If you are into a french fries food cart franchise, this franchisor might also encourage you to take in beauty products to “supplement” the income from your food stall. Even though it’s possible to sell multiple products that don’t relate to each other, the franchiser may not have a license to sell these secondary products. Some products they offer might come with vague guarantees on effectiveness or require government approval for sale in an accredited retailer.

Potential partners find it difficult to find business support.

Are you looking for ideas on location, storefront design, or staff hiring for your franchising business? This company doesn’t have a competent team to address those questions, leaving you to conduct due diligence, which, of course, takes time. As an investor, you could devote time and effort towards advertising and marketing of the business or looking for potential business partners.

Franchise package cost is way higher than a detailed breakdown of expenses.

If the franchise fee is P1 million for an initial set of products and other undisclosed items, do the math. Does it cost this much to operate as if you are a startup business? Branding may drive costs up as popularity brings in trust and band of loyalists, but if you think this is too much, just walk away.

Unstable supply chain.

Observe how other franchisees operate and ask them questions. Does the franchiser provide prompt delivery of materials or occasional delays that cost the business? A steady business operation requires an adequate supply of raw materials and guidance on how to manage customers, suppliers, and human resources.

Like Filipinos seeking employment abroad who fall into the trap of illegal recruiters after paying vast amounts of money, business venture through franchising can also end in a similar fate. Hopefully, you’ll be able to verify the legitimacy of a franchise business before you engage with them through the warning signs described above.