When you’re excited about starting a new business through franchising, it’s easy to get swept up in the promise of a proven system and an established brand. However, not all franchises deliver on their claims—and some come with hidden pitfalls. Recognizing the red flags up front can save you from costly mistakes and disappointment down the road. Here are some of the most common warning signs to look for before you sign on the dotted line.
1. Unclear or Opaque Franchise Disclosure Document (FDD)
Why It’s Concerning
The FDD is meant to provide a clear picture of a franchisor’s history, fees, obligations, and overall financial stability. If you receive an FDD that’s missing critical information, is poorly organized, or contradicts itself, that’s a serious red flag.
What to Do
- Ask for clarification. Press the franchisor for detailed explanations on any vague or contradictory points.
- Consult a professional. Have an experienced franchise attorney review the FDD to ensure all legal and financial obligations are disclosed properly.
2. Excessive Fees or Unjustified Costs
Why It’s Concerning
While franchises do involve initial fees and ongoing royalties, these should be reasonable relative to the brand’s value, level of support, and market position. Extremely high fees—or excessive hidden costs—can erode profits quickly.
What to Do
- Compare to industry norms. Research similar franchises in the same category to gauge if the fees are on par.
- Validate the value of the fees with current franchisees. Ask franchisees if they are receiving value, support and fair profit margins given the fees the Franchisor is charging
3. Consistent Litigation Between Franchisor and Franchisees
Why It’s Concerning
Legal battles can indicate unresolved conflicts or systemic issues. If multiple franchisees are suing the franchisor (or vice versa) for the same reasons, you’ll want to dig deeper before joining the system.
What to Do
- Examine the nature of disputes. Review the litigation section of the FDD to see if disagreements stem from royalty disputes, lack of support, or misleading profit claims.
- Contact current franchisees. Ask about their relationship with the franchisor and whether they’ve faced or heard about any legal hurdles.
4. Weak or Non-Existent Training and Support
Why It’s Concerning
A franchise’s core appeal is the support and systems provided. If the franchisor offers only minimal training or outdated operational resources, your journey to profitability becomes far more challenging.
What to Do
- Attend discovery days. Ask pointed questions about the franchise’s training program, ongoing support, and technology tools. Seek out the leadership team and ask them your questions. They will be the folks supporting you, once you decide to become a franchisee.
- Speak with existing franchisees. Get candid feedback on whether the franchisor’s support meets (or falls short of) expectations.
5. Unrealistic Financial Projections
Why It’s Concerning
Some franchisors may make aggressive earnings claims in their marketing materials—even if these figures aren’t backed up in the official documents. Overpromising can be a red flag that the franchisor is more focused on selling franchises than ensuring franchisee success.
What to Do
- Compare Item 19 to marketing claims. Check whether the FDD’s Financial Performance Representations align with what the franchisor is touting online or during presentations.
- Talk to actual franchisees. Their real-world experiences can help verify whether the financial promises are credible. This is especially critical when trying to determine proper expectations for your ramp up with the brand, as often times year 1 franchisees are not included in the item 19 data.
6. High Franchisee Turnover
Why It’s Concerning
A revolving door of franchise owners—either through closures, transfers, or terminations—often signals underlying problems such as insufficient training, poor unit economics, or dissatisfaction with the franchisor’s support.
What to Do
- Review Item 20 in the FDD. Pay attention to how many locations have opened vs. how many have closed or changed ownership.
- Ask direct questions. If there’s a high turnover, ask the franchisor for an explanation and see if the reasons feel credible.
7. Limited Territorial Protections
Why It’s Concerning
If the franchisor doesn’t offer protected territories—or the protections are vaguely defined—you could face internal competition from additional franchisees opening in your backyard. This can undercut your sales potential and strain local marketing.
What to Do
- Study the territorial clause in item 12 of the FDD.. Make sure you understand how territories are assigned and whether the franchisor can place other locations nearby.
- Get clarity in writing. If the franchisor promises geographic exclusivity, confirm it’s spelled out in your contract.
8. Lack of Transparency in Marketing Funds
Why It’s Concerning
Most franchisors require franchisees to contribute to an advertising or marketing fund. If how the fund is managed—or how the money is spent—seems murky, you could be paying into a system that yields minimal benefit for your specific location.
What to Do
- Check FDD disclosures. These should detail how much you must contribute and where those funds go.
- Ask other franchisees. Inquire whether they feel their marketing dollars are well-spent and effectively managed.
9. Pressure to Sign Quickly
Why It’s Concerning
High-pressure sales tactics—like limited-time offers, fast-approaching deadlines, or special discounts—can be a strong warning sign that the franchisor prioritizes rapid expansion over careful franchisee selection and long-term success.
What to Do
- Take your time. The FTC mandates that prospective franchisees must receive the FDD at least 14 days before signing or paying any fees. Use that time to consult legal and financial advisors.
- Don’t be rushed. If the franchisor resists your due diligence, that’s a red flag in itself.
Conclusion and Next Steps
Franchising can be a lucrative and rewarding way to become a business owner, but not all opportunities are created equal. Spotting red flags early on can help you avoid investing in a shaky system that could jeopardize your finances and aspirations. When in doubt, trust your instincts and lean on professional advice—speak with a franchise attorney, accountant, or experienced consultant to assess each concern thoroughly.
Have questions about identifying red flags or ensuring a franchise opportunity aligns with your goals? Feel choose a time to talk for a more detailed discussion. Armed with the right insights and expert guidance, you can make a more confident, informed decision about franchise ownership.
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