How to Spot a Franchise Scam

Before the 1960s and 70s –long before the franchise industry was regulated –investing in a franchise was as risky as putting your retirement savings into Enron.

Over four decades into these regulations and the perils of getting trapped into a franchise scam have not yet ceased to exist.

According Brad Sugars, who is at the helm of the business coaching franchise ActionCOACH, it is in the hands of prospective franchisees to protect themselves from these fraudulent franchises.

“It is imperative that prospects carry out thorough and extensive research before committing their hard-earned money to a franchise system,” Sugars said. “There are too many superior systems available for various budgets and there is absolutely no reason to settle for anything less than the very best.”

One of the most valuable research tools available to prospective franchisees is the Franchise Disclosure Document or the FDD. Every franchisor –by law is required to provide their prospective franchisees with this document.

The world-wide web is also a huge resource –with a wealth of information. However, Brad Sugars provides caution while using this superb resource for researching a system.

“Don’t believe everything you see or read online, “Sugars said. “With the ease of self-broadcasting and self-publishing, anyone with basic skills and a PC can publish what they like –without any regulation. You need to use your own judgment and carry out thorough research by talking to other franchisees as well. ”

Sugars believes a franchise is only as good as its brand name – which eventually determines the performance and success of other franchisees within the system.

“A good franchise is one with a broad recruitment process, which at some point replaces the selling process so only the most able gain entry into the system,” Sugars said.

Sugars lists a number of critical areas that –through careful analysis can help you detect a scam:

Years of experience in the business: According to Sugars, the number one thing to look out for –when looking for signs of a spurious or inept franchise is the number of years the company spent in the business before entering the franchise industry. “I spent years coaching businesses before I went into franchising. I have personally invested millions of dollars into establishing and perfecting the systems of my franchise,” he said. “Unfortunately, many franchise companies venture into franchising before getting into the business they are in. They are incompetent with flawed systems and many franchisees are getting ripped off by such companies.”
Experience of the management team and how it supports franchisees: Sugars warns against investing in a franchise with an inexperienced team.
“Each member on my team at ActionCOACH has a good understanding of not only the business coaching industry but also of franchising,” he said.
It is a good idea to call franchisees and see what they think of the management team and also find out what type of support they will provide you.
The financial condition of the company: Needless to say, the financial health of the franchise is vital in your decision-making process.
Can they justify the franchise fees? Prospects looking to invest in a recognized brand with thriving franchisees should be prepared to pay a hefty franchise fee. In order to determine if the fees are acceptable, Sugars encourages prospects to ask existing franchisees if they are getting value for their buck.
The franchisor’s litigation history: While litigation is the cruel reality of doing business in today’s world –with most companies having some type of legal action by or against them –it is essential to closely scrutinize these cases, which are available in the FDD.
Awards by Recognized Institutions: The growing popularity of the franchise industry has given rise to several reputable organizations that award franchises based upon their financial viability, training and support, systems maturity, etc. Brad Sugars deems an award-winning franchise to be a good indicator of an honest and successful franchise system.

ActionCOACH is the world’s number one business coaching and executive coaching firm, with more than 1,000 offices in 26 countries. To learn more, go to actioncoach.com.

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