How to Identify a “Fly-by-night” Franchisor

Use these tell-tale signs to spot a shady franchisor.


How to Identify a “Fly-by-night” Franchisor

It is very difficult to spot shady franchise companies as people who set out to defraud the public usually do a good job of being dishonest. However, there are some tell-tale signs to watch
out for:

  • Prospective franchisees often bemoan the fact that the bank turned down their loan even though they complied with all the requirements. This in itself could be an indication that the bank might not have confidence in the franchise company that the borrower is interested in. The bank could be doing the prospective franchisee a favour.
  • FASA strongly advises all potential franchisees to investigate the brand they are interested in very thoroughly – it is imperative that an up-to-date and comprehensive disclosure document is given to the potential franchisee after their application has been approved on paper. If there is no disclosure document available or if it is not comprehensive, be wary of continuing to pursue the opportunity. For a guideline on what a disclosure document should contain go to www.fasa.co.za/content/About%20Us/Disclosure.pdf
  • Potential franchisees should interview or meet with existing franchisees of the company they are interested in. Pertinent questions should be discussed with franchisees. Did the store open on time? Were the establishment costs similar to the amount stated upfront? Does the franchise company deliver on promises in terms of training, support, marketing and guidance? Is the franchisee happy with the return on investment? And the most important question of all – Would the franchisee buy another outlet from this franchisor should the opportunity arise?
  • When potential franchisees mention that they cannot obtain financial information from the franchise company, this could be an indication that there is a reluctance to share financial information. This is problematic – financial information should be contained in the disclosure document.
  • It is always a good idea to give the information to an experienced franchise attorney and an accountant for an opinion or comments – these specialists charge fees but this is often the best investment a would-be franchisee can make.
  • It is important to note that the franchise industry is not yet regulated or legislated in South Africa so if something goes wrong, the only recourse available to the franchisee would be through a court of law – court battles are lengthy and extremely expensive.

This is a good reason to do business with a FASA member, as all franchise companies that are members of FASA have signed its Code of Ethics and complied with FASA’s strict membership criteria. FASA has been a member of the World Franchise Council for many years and enforces international franchise standards and promotes ethical behaviour locally.

FASA often assists with dispute resolution in the industry and it offers free mediation services to members.

Franchise Zone
About the Author
Franchise Zone is published by Entrepreneur Media SA. It offers advice and franchising opportunities in South Africa.

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