5 Warning Signs When Choosing a Franchise

Contents:

• Unclear Product Idea
• Unclear Financial Performance
• Low Branding and Its Impact on Popularity
• Lack of Quality Control System
• Lack of Organized Educational Structure
• Key Aspects of Franchise Verification for Potential Franchisees
• Key Aspects of Choosing a Franchise in Three Main Points

Restaurateur Ervand Galstyan, who is the founder of the Family Garden holding, shared his observations about the red flags that are worth paying attention to when choosing Franchises.

A franchise is a quick way to start your own business based on a proven model and with the help of a professional team. However, not all franchises demonstrate equally positive results: there are often options that can lead to financial losses. For this reason, before signing a contract to acquire such a business, it is extremely important to carefully analyze a potential partner (franchisor) and weigh all the possible risks.

In this material for the editorial board of "Business" Skillbox Media, I will share five signs that may indicate that the franchise you have chosen is not the best choice.

• Unclear idea
• Lack of clear and understandable business metrics
• Low brand recognition.
• Lack of quality control.
• There is no clearly organized education system.

In the final part of the article, I will share recommendations on how to evaluate the franchisor in advance.

Unclear product idea

The key element of a successful franchise is a clear understanding that A company clearly offers its product or service to customers. If the product's benefits aren't obvious and difficult to articulate, potential buyers won't grasp its value. This, in turn, calls into question the potential success of the business.

Be wary of franchises based on temporary trends. What's in demand today may become irrelevant in just a few months, especially if the company lacks a strategy for when initial interest wanes. A prime example is franchises that profit from selling popular toys or clothing, such as blankets with sleeves.

A responsible franchisor considers not only the current demand for a product, but also its potential for future development, as well as its contribution to society.

Unclear Financial Performance

Disclosure of financial data allows prospective franchisees to thoroughly research the situation and make an informed decision about the advisability of investing in a given business.

The franchise website typically provides basic information, including the required investment amount, the lump sum fee and royalties, and the payback period for the project. More detailed information is usually available upon request from interested parties.

When a potential partner is evasive or provides only partial information, this may be a cause for concern. In such cases, I recommend taking the following steps if you have any doubts:

• Please obtain financial statements, as well as income and expense information for the last three years.
• Make sure that the financial performance data has been independently verified, preferably for the last two to three years.

If necessary, seek advice from franchising specialists or lawyers with relevant experience. They will be able to help you analyze the possible risks and make an informed decision.

Low Branding and Its Impact on Popularity

If the franchise remains largely unknown, a potential franchisee will need to invest not only in starting the business, but also in its marketing and promotion.

There are three key signs that can help identify low brand awareness:

• Potential buyers may be unfamiliar with the franchise or may not perceive it as different from competitors' offerings.
• The company lacks a memorable logo, corporate colors, or other identifying attributes, such as a mascot, fonts, or a compelling slogan.
• The lack of reviews, recommendations, and media mentions means the company doesn't appear to be a reliable and well-known brand.

To understand how much the audience is aware of the franchisor, you should rely not only on your own feelings, but also use a variety of marketing and PR tools. Here are some examples of such tools:

• Opinion research and surveys can be useful tools. For example, you can ask participants what brands in a given area they know, whether they inspire confidence, and for what reasons.
• Studying search queries. For example, using tools such as Google Trends or Wordstat, you can determine how often users enter a brand name into search engines.
• Analyzing brand mentions in the media allows you to find out how often an organization appears in the news and how it is talked about.

You can also pay attention to franchise lists. For example, the rating compiled by the Businessmens directory is based on information on over 2,500 franchises in Russia and the CIS. Positions in this rating are determined depending on the amount of initial investment, the size of the lump sum fee, the average time to return on investment, the rate of network growth, as well as the reputation and popularity of the brand.

According to the results of 2024, two marketplaces - Ozon and Wildberries - were among the top ten in the rating, as well as companies from the catering industry such as Rostic's, Pro.Khinkali, and Dodo Pizza. The list also includes retailers including Pyaterochka, Ulybka Radugi, and Okolo, as well as real estate players such as Samolet Plus and the Yandex Lavka delivery service.

Lack of an organized educational structure

Responsible franchisors strive to ensure that their partners achieve success in business, so they provide assistance at every stage of interaction. Typically, a franchise package includes:

• assistance in selecting the optimal location for launching a business;
• Marketing tools cover a wide range of activities - from market research and competitor analysis to identifying the target audience, as well as recommendations for optimal budget allocation and promotion strategies.
• Consultations are provided at every stage - both before the start of operations and during its implementation.
• Advanced training is intended for managers, business owners, and line employees. It may include basic management courses, practical master classes, personalized coaching sessions, and access to exclusive educational platforms.

The Novikov Group culinary union "Family Garden," which includes eight franchises, organizes centralized training for managers in Moscow. Training for dining room and kitchen staff takes place directly on the premises of the restaurants, where special checklists have been developed for each position and process.

Key Aspects of Franchise Review for Potential Franchisees

Before signing a contract and investing, it's important to thoroughly research the franchisor. Don't rely solely on presentations and promises—it's important to conduct your own due diligence. Below is a list of steps to help you make an informed choice.

Conduct research on franchises using independent sources. Useful information can be found on aggregator platforms such as TopFranchise, Franchise.ru, and Sravni.ru. These resources regularly provide up-to-date information on the functioning of franchises, compile ratings and conduct reviews of various companies, which will help you get a more complete picture of a potential business partner.

Personally evaluate the quality of the product from the consumer's perspective. For example, order a set menu of popular dishes at a restaurant and form your own impression of the concept, speed of service, and taste of each item. Your goal is to determine whether the potential customer will want to return.

Review the company's financial statements and business model. Request financial documents for the past 3-5 years, including information on profitability, margins, and chain growth rates. Analyze revenue sources, determine which expense items impact profitability, and find out what mandatory payments are included. All data presented should be clear and logically justified.

Interact with current franchisees. Find out what their experience with the franchisor has been: how they perceive the level of support provided, how successful the business has been in practice, and whether real-world performance matches the company's stated figures. During the conversation, focus not only on the positive aspects, but also on the challenges faced by partners and how the franchisor helped solve them.

Analyze the current market situation and study your competitors. Find out which companies are already offering their services in this segment in your region. Pay attention to their advantages and disadvantages, as well as pricing and customer loyalty. This will help you determine whether your new initiative has the potential to succeed.

Analyze the possibilities of a location in a specific area. Assess the real potential for increased revenue and profitability of the franchise in this location, based on the investment plan. Franchisors are ready to provide additional information for calculations upon request.

Carefully read the terms of the franchise agreement. If necessary, consult a professional lawyer for a detailed review of all clauses. Particular attention should be paid to such aspects as the territory within which the franchise operates, the rights and obligations of both parties, liability for possible violations, the dispute resolution procedure, as well as the terms and conditions regarding termination of the agreement.

Key aspects of choosing a franchise in three main points

• A franchise provides an opportunity to quickly start a business, following an already developed model and using a well-known name. However, before making a purchase decision, you should carefully evaluate how effective and sustainable this business model is.
• Before deciding to purchase a franchise, it is important to pay attention to several key signals. These include an unclear product concept, low brand recognition, lack of transparency in business metrics, lack of quality control, and an unformed training system that the franchisor should provide.
• Before signing the agreement, it is recommended to carefully analyze the franchise from a consumer perspective. Pay attention to its financial performance and business structure, talk to current franchisees, and research market conditions and competition. It's also important to evaluate the capabilities of your chosen location and thoroughly review the terms of the agreement.

Additional Skillbox Media resources for business owners.

• Franchises are a business model in which one party, called the franchisor, grants another party, the franchisee, the right to use its brand and business methods. This partnership allows franchisees to launch their own business, building on proven concepts and support from the franchisor.

  There are several types of franchises. Some focus on selling products, while others focus on providing services. Full-service franchises are also available, where the franchisee receives complete guidance on all aspects of the business, including training, marketing, and management. There are also those that offer only specific elements, such as a brand or technology, without delving deeply into operational processes.

  Franchises can be local, regional, or international. Local franchises typically cover limited geographic areas, while international franchises have a wider reach and can operate in multiple countries.

  Thus, a franchise is a way to start your own business using an established brand and business model, while providing the opportunity to receive support and knowledge from a more experienced party.

• Starting your own business requires a careful approach and understanding a number of key aspects. First of all, you need to conduct a market analysis to understand which niches are vacant and where there is demand for goods or services. This will help you determine what exactly you want to do.

  The next step is to develop a business plan. This document should contain a detailed description of your idea, development strategy, financial calculations, and forecasts. A well-written business plan will not only help you structure your thoughts but also attract potential investors.

  Also, it's important to decide on the business structure: it can be a sole proprietorship, a limited liability company, or another form. The choice depends on the scale of your operation and the level of responsibility you're willing to take on.

  Don't forget about the legal aspects: business registration, obtaining the necessary licenses and permits—all of this is necessary for legal operation. It's also worth studying tax laws to understand what obligations you'll have.

  When starting a business, it's important to establish a marketing strategy to attract customers. Advertising, social media promotion, and website creation can play a crucial role in attracting attention to your product or service.

  Finally, be prepared to constantly learn and adapt. The world of business is changing rapidly, and success requires flexibility and a willingness to embrace new challenges. Don't be afraid to seek advice from experienced colleagues and surround yourself with professionals who will help you along the way.

• In 2025, the implementation of various programs aimed at supporting small businesses will continue. These initiatives will encompass both federal and regional and industry-specific programs.

  At the federal level, the focus will be on providing financial assistance, subsidies, and tax breaks for small businesses. Furthermore, access to credit is planned to be expanded, allowing entrepreneurs to more easily obtain the necessary funds to grow their businesses.

  Regional programs will also play an important role in supporting small businesses. Each federal subject will be able to offer its own unique measures, tailored to local conditions and needs. This may include training, consulting services, and assistance in entering new markets.

  Industry-specific initiatives will focus on specific economic sectors, such as agriculture, IT, or tourism. These programs will be aimed at stimulating innovation and developing competitiveness in these areas, which will help small businesses strengthen their position in the market.

  Thus, in 2025, small businesses will be able to count on various forms of support that will help them adapt to changing conditions and develop successfully.

• Five common mistakes that can ruin startups.
• Creating a business plan is an important step for any entrepreneur. It serves not only to define a strategy, but also to attract investors. The main sections that should be included in this document may be the following:

  1. **Project Summary**. In this section, you should briefly outline the main ideas of your business, goals and expected results. This is a kind of business card that should interest the reader.

  2. **Company Description**. Here you should tell in detail about your company, its structure, mission and values. Indicate what you plan to do and what unique offerings you can offer to customers.

  3. **Market Analysis**. In this section, it is important to conduct research into your target audience and competitors. Describe who your potential customers are, what their needs and preferences are, and analyze how your competitors meet these needs.

  4. **Marketing Strategy**. Describe how you plan to promote your product or service in the market. Include distribution channels, advertising measures, and pricing policy.

  5. **Organizational Plan**. In this section, you should outline the structure of your business, the roles and responsibilities of key personnel, and the number of employees required.

  6. **Financial Plan**. This section includes revenue and expense projections, a break-even point analysis, and financial ratios that will help assess the viability of your business.

  7. **Appendices**. Here you can add additional materials, such as graphs, tables, charts, or documents that support your arguments and conclusions.

  Each of these sections should be carefully crafted to create a clear and compelling picture of your business project.