Like any other business, franchise operations are not immune to the risks of bankruptcy. They, too, can suffer from over-expansion, undercapitalization or changing consumer tastes.
Bally’s Total Fitness, Blockbuster, Chevy’s Fresh Mex, Quiznos, Perkins Restaurants and RadioShack are just a handful of the many franchisors that have flirted seriously with going under or failed outright – proving that no industry is safe and no brand name too large. In fairness, it should be noted that many of these companies have since restructured and are operating franchises today.
Will other franchisors follow these companies into Chapter 11? Given that there are more than 3,000 franchise brands in operation in the U.S. according to Forbes magazine, you can bet that more than a few are tottering financially if not on the brink of total failure.
So, what’s an entrepreneur to do if evaluating a franchise opportunity?
In 8 Warning Signs You Shouldn’t Buy a Franchise, AllBusiness.com reviews the red flags that potential purchasers should be on the lookout for. And, while all eight warning signs don’t apply to franchisor viability, three do. Among keys to discerning a franchising network with potential viability problems, they suggest you:
1. Lookout for a checkered past. The article notes, “Just by doing some basic Google searches, you should be able to determine what kind of reputation a franchise company has. Is there a long history of legal problems? Are other franchisees complaining about the company? Has the franchisor recently experienced serious financial trouble or some sort of public relations nightmare?”
2. Beware of high franchisee turnover. AllBusiness says, “Item 20 of the FDD (Franchise Disclosure Document) reports how many franchisees have left a franchise system within the last three years. A high turnover rate in relation to the total number of franchisees — especially if startup costs are relatively high — is a sign the opportunity may not be viable, or the systems being duplicated aren’t working anymore.”
3. Take caution in over experimentation. The online source suggests that “If a franchisor prides itself on constantly changing methodology, or if current franchisees are having a difficult time keeping up with how many ‘strategic pivots’ the parent company makes each year, that key benefit (of a time-tested business model) is gone. Apparently, the ‘proven, duplicatable system’ doesn’t work.”
The final recommendation to potential franchise buyers from AllBusiness? Perform your due diligence. “If you’re investigating a franchise opportunity and don’t encounter any of these warning signs, there’s a good chance you’re looking at a legitimate opportunity. Even then, however, it’s best to have a team of experts (business broker, lawyer, CPA) assist you in reviewing documentation and comparing various franchise options before you settle on the right one for you.”