How to Safeguard Your Investment from Fake Franchise Fraud

How to Safeguard Your Investment from Fake Franchise Fraud?

Franchise fraud is nothing but a misleading transaction used to attract potential franchisees into purchasing a false business model and stealing their initial investment.

• India is the second-largest franchise market globally
• Around 1.5 lakh franchisees and 4,600 franchisers operating in the country.

Franchising is remarkable model that permits both the parties (franchisor and franchisee) to take full advantage of it in establishing their businesses successfully. Franchising offers a chance to be associated with an established brand and just like any business venture, buying a franchise takes a serious amount of consideration.

As a possible future franchisee, it is quite exciting knowing you’re only a few steps away from owning your business. Expect to encounter some challenges, but if there is one thing you want to be very careful about, that is falling prey to franchise frauds. A franchise system is only as strong as its brand, and that brand rests to a great extent on how well the different franchisees in the framework perform. If the franchisor allows anyone in the system who has money and does not have selection criteria, then your investment will probably be at risk.

When you first contact the company, ask them about the process they use in selecting franchisees. If you get the sense that they don't select franchisees but are in the business of selling franchises, that's your first indication the franchise is risky.
Here are some aspects that you must consider while buying a franchisee.

Dig deeper to know the real truth

Even before you get to the point of contacting a franchisor, you can get a sense of whether their opportunity is for real. Go online and research news stories about the company and the industry. Visit their Web site and get information about their consumer offering as well as their franchise offering.
Compare the company to its competition-both franchised and non-franchised. Locate some of their stores and speak to existing franchisees. Then, when you're satisfied, contact the company.

Check the financial condition of the company.

Your investment will probably be significant. Franchisees will be required to pay an initial franchise fee when buying a franchise from the franchisor. In some franchises, between debt and equity, your investment may exceed seven figures. Every new franchisor needs to have financial resources to meet their commitments. So you need to find answers about questions such as

1. Will you have more skin in the game than the franchisor does?
2. Do they have a history of profitability?
3. Are they earning their revenue from royalties and other continuing sources of revenue, or are they depend upon the sale of the next franchise to make payroll?
4. The answers will give you a clear idea of the company’s current financial condition.

Other indications of fraud franchisee

• They offer Unrealistic profit – Guaranteeing a certain amount of profit in no time is just too good to be true. Franchising will not give you overnight success, it requires hard work and time. There is no such thing as “buy a franchise today and start earning tomorrow”.

• As an entrepreneur, you should collect adequate information about the brand you are planning to take the franchise of. Complete research should be done to know about the company, its brand value, the number of franchisees and the vision of the company. You can do this by communicating with different franchisees of the same company, or other specialists in the industry.

• They guarantee other benefits– A genuine franchising company offers to its franchisees’ many incentives in terms of a well-recognized brand name, training module, guidance, and support. A franchisor may offer every support and back-up to his franchisees to work successfully and profitably.

• However, fraud franchisors never guarantee success and enormous returns on your investment. The success and profit of the franchise unit largely depend on the franchisees’ communication and management skills. So, if a promoter offers you guaranteed success and profits, then do evaluate his claim by talking to experienced businessmen of the same sector.

• They will offer a Money back guarantee- As an entrepreneur, in a franchise system, you should understand the value of franchise fees. If a promoter is offering money-back guarantee of a franchise fee, then do no trust him.

• Because a successful franchisor would never offer you the money-back guarantee. He would collect the franchise fees to provide his franchisees with the various aids and provisions to ensure the success of the franchised unit.

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