If you are looking to purchase a franchise, there are a number of warning signs that may suggest this is not a genuine business. The key legal document you will be signing is the franchise agreement and you should carefully review your rights and obligations under this agreement before agreeing to anything.
Here are some warning signs to look out for to help you determine whether or not the franchise is genuine:
Have you been given a disclosure document?
Under Australian law, a franchisor must provide you with a disclosure document prior to entering into the franchise agreement. The purpose of the disclosure document is to give sufficient information to you so you can make an informed decision about whether to enter into your franchise agreement. This includes estimating all the expenses you will incur. If you are not provided with a disclosure document, you should request a copy from the franchisor and, if necessary, inform the franchisor that it is their obligation to provide you with such a document. If you are provided with a disclosure document, you should check the date it was last updated as disclosure documents need to be updated annually. You should have concerns as to whether or not the franchise is genuine if they do not provide you with an up-to-date version of the disclosure document.
Is this a “get money fast” scheme?
If a franchisor promises that you will make large returns within a short timeframe, this should raise concerns. Most “get money fast” schemes are largely misleading and may only provide you with a high rate of returns if you make a large capital investment or if you meet sales targets that are not reasonable or commercially feasible.
You should be wary of these schemes, as the promoter will most likely not provide you with a complete and accurate picture of the franchise business.
Are you able to speak directly with the franchisor?
The disclosure document must provide you with the contact details of the franchisor. It would be prudent to make contact with the franchisor in person.
The franchisor is also required to disclose contact details for all existing franchisees in the disclosure document. We highly recommend that you contact as many existing franchisees as possible and make enquiries as to how their business is fairing, what kind of profits they have earned and any problems or issues they have encountered.
Any reluctance on the part of the franchisor to meet you in person or provide you with contact details for all existing franchisees should raise alarm bells that this franchise may not be genuine. If the franchise is genuine, he or she should have not reason not to want to meet with you.
While these are some clear signs that a franchise may not be genuine, more subtle indicators may also become apparent on a thorough review of the franchise documentation. We highly recommend that you have a franchise lawyer review your franchise agreement and disclosure document so you are fully informed about your obligations as franchisee and to possibly alert you to any warning signs that this franchise business may not be legitimate.