How to play safe if you're thinking of buying a franchise : Internet Scambusters #1,086
With more and more people opting to start and run their own business, franchises, in which you pay to operate under a well-known brand name, are growing in popularity.
That's why scammers have moved into this business field with a variety of con tricks aimed at taking your money.
If you're thinking about buying a franchise, here's what you need to know and how to avoid fraudsters.
Let's get started…
12 Red Flags That Signal A Franchise Scam
You want to start your own business. Buying a franchise looks like a good way to go because a lot of the things you need are already in place. But watch out: scammers could be on your trail.
In simple terms, a franchise is defined by Investopedia as "a type of license that grants a franchisee access to a franchisor's proprietary business knowledge, processes, and trademarks, thus allowing the franchisee to sell a product or service under the franchisor's business name."
An example would be a fast food restaurant. Some McDonald's restaurants, for instance, are not owned by them but owned or rented by a franchisee who gets to piggyback on their name, products, and marketing.
It's not exactly the same as owning your own business because the franchising company still gets to dictate how you operate.
Although many franchises are expensive, there are plenty of others that only require a small upfront cost, which is where the crooks do their trawling for victims.
They make false promises about earnings potential or lie about their brand reputation and awareness. Some scammers even sell fake franchises, collecting fees while offering little or no guidance.
12 Red Flags
If you're thinking about buying a franchise, here are some of the scam warning signs to look out:
- "Guarantees" about how much money you'll make or forecasts that seem too good to be true or suggest you'll get rich quickly.
- High pressure and urgency tactics to try to close the deal.
- It's not 100 percent clear what the product or service is. This may be a sign of a pyramid scheme.
- Claims that the business is easy to operate and won't take much time and effort to set up and run. This is generally untrue of franchises.
- Lack of recent audited statements or conflicting or unclear financial information.
- Lack of relevant paperwork, including a critical document known as a Franchise Disclosure Document (FDD). Also, beware of a refusal to let you see the FDD before a face-to-face meeting.
- Vague claims that the business is growing fast, without any supporting information.
- Excessive upfront fees, especially those that aren't adequately explained and justified. Never pay upfront for "registration," "processing," or a non-refundable deposit.
- No brand name recognition or registered trademark and logo.
- The program offers little or no training and support, especially at the outset. You should be looking for a structured training program and a detailed operations manual.
- Lack of a marketing plan that might otherwise show you how the franchisor plans to promote your activities.
- The franchisor appears to have little or no experience in the business field they're trying to lure you into.
Also, watch out for franchise names that are different but very similar to existing legitimate businesses.
Actions You Can Take
As always, it's important to do your online research on the names and reputations of the organizations you're thinking of linking up with. Any suggestion of deceptive business practices or other complaints should stop you in your tracks.
If the name doesn't come up at all, then there's a high likelihood it's a scam. Even if it's not and is brand new, you probably don't want to be the first person to dip a toe in the water.
And even if the offer uses a well-known brand name, you must still check out that it's the real thing. Recently, scammers have been advertising franchises for the KFC fast food chain, but in fact they had nothing to do with the genuine company.
Furthermore, it's vital to get feedback from existing and past franchisees. Look for information on practices and support systems. Beware of glowing reviews!
And, in weighing up your decision, review the FDD thoroughly, taking a skeptical approach on earnings claims because these are usually best-case scenarios. Carefully check the expectations of the franchisor about your performance and their right to terminate the franchise.
Final tip: If you don't understand everything, don't sign!
There's a lot more than scams for would-be franchisees to worry about. It can be complex, and you shouldn't go ahead until you have a full understanding of how they work.
In particular, you need to understand the difference between a franchise, a "business opportunity" and "license." If anyone claims they're all the same, they're lying. This is a common tactic used by crooks.
There's plenty of information online and in your bookstore. Also, check out our earlier issue on franchise scams: Could That Business Opportunity Be a Franchise Scam?
The US Federal Trade Commission is an excellent source of information too on the pitfalls of franchising. Start here: Franchise Fundamentals: Debunking Five Myths About Buying a Franchise.
Note: The above contents are for information only and do not constitute legal or financial advice for which you should consult a professional
This Week's Alerts
Kids' health insurance: If you participate in your state's Medicaid Children's Health Insurance Program (CHIP) watch out for scam notifications that it's renewal time, asking for payment or personal financial information, which is then used for identity theft. You don't have to pay to enroll or update your CHIP participation. If you get a call or message asking for this, it's a scam. If in doubt, contact your state's Medicaid agency. You can find them via Medicaid.com.
Another tax scam: Don't believe an email notification seeming to come from the IRS asking for more information about you for their records and promising an extra refund if you provide it. It's simply a phishing attempt to get hold of your bank details.
Time to conclude for today -- have a great week!