The biggest franchise red flags are pressure to sign or pay before the 14-day disclosure window is up, numbers regarding revenue or income that cannot be validated, a pattern of lawsuits or turnover nobody will explain, promises that never make it into the agreement, and vague answers about support. None of them automatically kills an opportunity. All of them are questions.
Plenty of franchisors do this the right way. Knowing the red flags is how you tell the difference early, before you’re invested in a particular outcome.
Red flags in the sales process
Pressure to move faster than the rules allow
You have to receive the Franchise Disclosure Document at least 14 calendar days before you sign a binding agreement or pay the franchisor anything. If the franchisor materially changes the agreement on its own, you get the revised version at least 7 calendar days before you sign it.
A franchisor who is careless about the disclosure window is telling you something about how they’ll handle everything else.
Territories do fill up, and sometimes timing really matters. But real scarcity and pressure to skip steps are two different things. The first is a reason to move with focus. The second is a reason to slow down.
Income numbers that aren’t in Item 19
Item 19 of the FDD is where a franchisor may share financial performance information. It’s optional, and plenty of systems leave it out. That’s legal, and it isn’t automatically a warning sign.
What is a warning sign is someone filling that gap out loud. Under the federal rule, anyone selling a franchise can’t give you sales or earnings figures that aren’t in Item 19. That includes the franchisor, its salespeople, and brokers. There are two narrow exceptions: the actual records of a specific existing location you’re looking at purchasing, and information that supplements Item 19 for a particular location or set of circumstances.
If someone offers you a number, ask where it came from. A number offered with nothing behind it is a warning sign.
Promises that never make it into the agreement
A protected territory. A level of support. A timeline. If it matters to you, it needs to be in the franchise agreement. Item 12 tells you what territory rights you’re actually getting. The standard agreement is attached to the FDD, so you can read it long before anyone asks you to sign.
If a salesperson tells you something that isn’t in the documents, ask for it in writing. If it can’t be put in writing, don’t count on it.
Guarantees
No franchise can guarantee results. A good system gives you training, support, and a proven way of doing things. What happens after that is behavior driven. Treat any promise of guaranteed success as a reason to slow way down.
Resistance when you want to talk to owners
Item 20 lists current owners and owners who left the system during the franchisor’s last fiscal year. Every conversation with them is voluntary, and some owners are simply too busy to talk. That’s normal. A franchisor that discourages you from calling beyond a hand-picked list is not. Here’s how to validate a franchise the right way.
Red flags in the FDD
The FDD exists to prevent quick decisions and to promote questions. Read it with a pen, and pay extra attention to these:
- Item 3, litigation. Some litigation is normal for a company that’s been around a while. A pattern, especially lawsuits from former franchisees circling the same complaint, deserves a closer look.
- Item 4, bankruptcy. Look at the bankruptcy history of the franchisor and the people running it.
- Item 20, turnover. A number that looks bad can have a perfectly good explanation behind it. Turnover the franchisor isn’t comfortable explaining is worth slowing down for. Item 20 also has to tell you if owners have signed confidentiality clauses in the last three fiscal years.
- Item 21, financial statements. These show how solid the company behind the brand is. If reading financial statements isn’t your thing, this is a good place to bring in your accountant.
- State registration. Several states, including California, Illinois, Maryland, and New York, require franchisors to register before offering franchises there. If you’re in one of those states, ask whether the franchise is registered where you are.
Red flags in the answers you get
Ask the franchisor exactly what training and support look like after you open. Item 11 lays out the training program and what the franchisor owes you. Specific, consistent answers are a good sign. Answers that change depending on who you ask are not.
Then check those answers against what owners tell you. When the pitch and the owners’ stories don’t match, trust the pattern you hear on the calls.
What to do when you spot one
One red flag isn’t automatically a reason to walk away. It’s a reason to slow down and ask better questions. Take notes. Don’t turn assumptions into conclusions. Turn them into questions, and ask the franchisor to explain.
Plenty of candidates also have an accountant or a franchise attorney they trust look at the documents. That’s a personal call, and there’s nothing wrong with it. Just don’t let a document review stand in for talking to owners.
Keep the goal in front of you. Learning the red flags isn’t about suspecting every franchisor. It’s about being confident in the ones that pass.
Where I fit
Part of what I do is eliminate the noise and the falsehoods so you’re only spending time on real opportunities. I walk candidates through the whole path, from the first conversation about what you actually want, through the research, the FDD, and the validation calls, until you reach a decision. Whichever decision that is. When you’re ready to move forward, here’s how to start a franchise once you sign.
I’m an independent franchise consultant, and I work with candidates nationwide. I’m paid by the franchisor when a placement is made, and I’m paid the same regardless of your investment. Your net expense to work with me is zero. You never pay me a dime.
Where to start
Finding a franchise is easy. Finding the right one for you is not.
If you want to see which types of franchises fit your goals and the life you’re trying to build, take the quiz. It’s a few minutes, and it gets us to a real conversation faster than anything else.
Rather talk it through first? Reach out through the contact form and we’ll set up a free 15-minute consultation. I’ll talk to anybody anywhere about franchising.
Matt Stevens Independent Franchise Consultant, The Franchise Guy
Nearly 40 Years in Franchising | 4 Businesses Owned | Nearly 1,000 Franchisees Placed | heisthefranchiseguy.com
Matt Stevens has spent nearly 40 years in franchising. He’s helped more than 3,000 people explore franchise ownership and placed nearly 1,000 of them as franchisees across more than 40 states. He has owned four businesses and served as Vice President and Partner in a $2 billion international franchise holding company. He works as an independent franchise consultant based in Dublin, Ohio, and his consulting is free to the candidate. Learn more about Matt
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Frequently Asked Questions
Pressure to sign or pay before the 14-day disclosure window is up, sales or earnings figures that aren’t in Item 19, a pattern of lawsuits from former franchisees, turnover the franchisor won’t explain, promises that aren’t in the franchise agreement, and vague or shifting answers about training and support. None of these automatically kills an opportunity, but each one is a question that needs a clear answer.
Not automatically. Every Franchise Disclosure Document has an Item 19, but including financial performance information in it is optional. Plenty of systems don’t, and that isn’t automatically a warning sign, particularly in newer or smaller systems. It does mean you’ll need to build your financial picture through conversations with owners. If someone fills the gap with verbal numbers, that is a red flag.
Only through what’s in Item 19. Under the federal rule, franchisors, their salespeople, and brokers can’t give you sales or earnings figures that aren’t in Item 19. The narrow exceptions are the actual records of a specific existing location you’re considering purchasing, and supplements to Item 19 for a particular location or circumstance. If someone offers a number, ask where it came from.
No. Some litigation is normal for a company that’s been operating for years. What deserves a closer look in Item 3 of the FDD is a pattern, especially several lawsuits from former franchisees circling the same complaint. Ask the franchisor about it, and ask owners too.
There’s no single number that applies to every system. Look at Item 20 of the FDD for openings, closings, and transfers over three years, and ask the franchisor to explain anything that looks off. A number that looks bad can have a good explanation. Turnover the franchisor isn’t comfortable explaining is worth slowing down for, and former owners are worth a call.
Slow down. You must receive the Franchise Disclosure Document at least 14 calendar days before you sign a binding agreement or pay the franchisor. A franchisor who is careless about that window is telling you something about how they’ll handle everything else. Real scarcity is different from pressure to skip steps.
Yes. If a salesperson promises something that matters to you, like a protected territory or a specific level of support, it needs to be in the franchise agreement. Item 12 of the FDD shows what territory rights you’re actually getting. If a promise can’t be put in writing, don’t count on it.
Not always. One red flag is a reason to slow down, take notes, and turn your assumptions into questions. What should carry real weight is a pattern, across the documents and across your conversations with owners. Learning the red flags is about being confident in the franchises that pass, not suspecting every one.
Ready to Find the Right Franchise for You?
Matt Stevens | The Franchise Guy | Dublin, OH 43016
Call: (614) 595-3726
