6 Franchise Red Flags to Watch Out For in the UK

Entrepreneurs who buy a franchise get to tap into an existing support network and customer base. As a result, this business model can involve less risk than starting an independent company. 

Even so, impressive marketing materials often hide empty promises. By learning how to spot franchise red flags, you improve your odds of making a smart investment. 

1) Unresponsive or Pushy Franchisor

Many entrepreneurs prefer to buy a franchise because they have someone to rely on for guidance. In theory, the franchisor has already been through it and can provide valuable assistance. In practice, an unreliable franchisor won’t be of much help.

A franchisor who doesn’t answer questions in the beginning, for instance, probably won’t counsel franchisees in the long run. You’ll have no choice but to navigate challenges on your own, which is not that different from starting an independent business.

Pushiness isn’t much better, either. If the franchisor is too quick to seal the deal, they might be hiding something fishy.

An aggressive attitude suggests that the franchisor is more interested in making a quick buck than in collaborating with the right partners. It can also indicate deeper issues like financial instability.

2) Excessive Fees

Data shows that 89% of franchised units in the UK are profitable, which should reassure aspiring franchise owners. Nevertheless, it’s vital to assess costs before signing on the dotted line.

Financial obligations include the initial investment, royalty payments, and additional fees. If any of these seem excessive, take a step back. High upfront costs can point to a franchisor being more focused on turning a profit than on building a sustainable business.

While it’s expected to pay initial fees that cover training, branding, and setup, they shouldn’t be astronomical. Not only will they impact your profitability, but they may hint at an ineffective business model.

Scrutinise the franchise agreement for hidden costs as well. Mandatory advertising fees or equipment purchases can drain your budget. They also limit your ability to make independent financial decisions that may benefit your location more. 

3) Poor Validation From Existing Franchisees

Unfortunately, there’s no shortage of franchise horror stories to scare off potential investors.

In early 2024, LaserClinics made headlines for closing stores after franchisees couldn’t afford the high equipment and supplies costs. Papa John’s also recently shut down several “underperforming” branches.

These stories underscore the importance of speaking with existing franchisees before deciding whether to invest. Negative feedback or a lack of enthusiasm on their part is a big franchise red flag. 

Reaching out to someone who has been through the process will bring clarity on how the franchisor handles training, communication, and marketing.

You can also gain insight into how high the fees are relative to the earnings. This will help you determine if the business model is as profitable as advertised. If franchisees can’t muster any excitement, investing is not worth the risk. 

4) Extensive Litigation History

A franchise tangled in legal battles can be more trouble than it’s worth. While studies show that 54% of franchisors have no litigation history, disputes aren’t uncommon - and a franchise with an extensive lawsuit record indicates issues surrounding the franchisor’s business practices.

If multiple franchisees have already felt compelled to take legal action, the franchisor might have failed to deliver the degree of support they promised. History has a tendency to repeat itself, so you might also face disputes over contract terms. 

Furthermore, litigation isn’t cheap. If a franchisor spends its resources on lawyer fees, they’re less likely to afford investments in training or marketing.

Look into the franchisor’s broader legal standing as well. Disagreements with suppliers or competitors suggest poor management or bad financial moves. These types of scandals affect the brand’s reputation. In other words, your business suffers, too. 

5) Vague or Unclear Contracts

A vague franchise agreement leaves you vulnerable. Unclear language about royalty fees or mandatory upgrades, for instance, may translate to hidden costs you don’t budget for. This can easily leave you financially stranded down the line.

Similarly, if the contract doesn’t outline the resources the franchisor must provide, they can go back on promises.

Worse, the franchisor might take advantage of contract ambiguities to enforce terms in their favour. This can mean imposing unreasonable renewal obligations or dissolving the agreement out of the blue.

All in all, the franchise agreement shouldn’t leave room for interpretation and should clearly outline both parties' rights and responsibilities. 

6) Unrealistic Promises or Guarantees

If something sounds too good to be true, trust your intuition. Any bold claims about guaranteed profits or exceptionally high returns usually signal a franchisor with little integrity or a shady business model.

While running a franchise can be profitable, it poses challenges. The 2024 Annual Franchisor Survey shows that 80% of franchises have unfulfilled job openings as the cost and quality of labour remain a major concern. Franchisors are also wary of higher costs, given the unstable nature of inflation.

Assurances of success can suggest that the franchisor is exaggerating benefits and glossing over setbacks. Someone invested in you will be transparent about obstacles you may run into along the way and honest about their financial performance.

Before committing, take the time to investigate unsubstantiated promises. Ask for realistic projections and detailed disclosures to make sure you have accurate data. As long as the franchisor is ethical, they’ll be happy to oblige.  

How to Make an Informed Decision When Buying a Franchise

Like with any business endeavour, buying a franchise has advantages and disadvantages. Knowing the warning signs empowers you to take the necessary steps to be confident in your decision.

Check for Franchise Red Flags

By carefully assessing red flags, you ensure you’re making a sound investment. Don’t be swayed by empty assurances or success stories you can’t verify. Doing your due diligence is crucial to avoid being tied up in a questionable agreement.

If you notice any of the six warning signs above, the franchise you’re looking into might not be a good fit. In that case, expand your horizons.

Research the Industry and Market Trends

The UK offers many promising franchise opportunities. Regardless of which business you choose, look into industry trends and gauge consumer demand. 

While being passionate about the business will significantly influence your decision, so should the potential return on investment.

Analyse industry reports and market forecasts to identify factors that could affect growth. You can also attend industry events and mingle with other franchisees. Inquiring about their experience can provide insight you can’t access otherwise.  

Evaluate the Franchisor’s Track Record

Besides alleviating litigation concerns, looking into the franchisor’s background can uncover a goldmine of information. If you want to appraise their reliability, start by evaluating their past performance.

A strong history highlights their dedication to guiding franchisees. A poor track record, meanwhile, can signal operational issues. You should also examine how the franchisor navigates industry changes to see if they adapt under pressure.

Analyse Financial Considerations

The one-year survival rate for a franchise is 6.3% higher than for an independent business. Even so, success isn’t a given. Costs quickly add up, which is why you need to understand how they will impact your business in the long term.

Pour over the Financial Disclosure Agreement (FDD) and review details like investment costs, ongoing fees, and projected earnings. Then, conduct a break-even analysis to determine how long it might take you to turn a profit. 

Don’t forget to factor in the local market, either, as competitors will likely play a role in shaping revenue.

Speak to Current and Former Franchisees

Franchisees can open your eyes to problems the franchisor might not be willing to disclose. These individuals have first-hand experience. They can inform you about the viability of your investment.

Ask the franchisor for a list of current and former franchisees and prepare questions. Inquire about their satisfaction with the business and any bumps they encountered starting up. Their feedback, positive or negative, will tell you more about the franchisor’s level of involvement.

Review Legal and Regulatory Compliance

Part of doing your research involves grasping your obligations concerning legal and regulatory compliance. It’s the only way to sidestep fines, lawsuits, or even early termination of your franchise agreement.

Investigate the franchisor’s track record with regulatory agencies. Then, consult with a franchise attorney to identify risks for your future business. There’s no such thing as being overprepared.

Buying a franchise can be daunting, especially when you're unsure of what to look out for when looking for a brand to partner with.

ActionCOACH offers a guarantee to make sure our franchise partners feel safe and secure in the first crucial months after buying a franchise territory.

Let’s work together to make your entrepreneurial dreams come true. Book a free discovery call with one of our advisors and start your journey to transform your future.