Best Practices for Avoiding Franchise Fraud

Posted on: May 15, 2019 by RMS Hospitality

As a business owner or entrepreneur, taking on a franchise business can be enticing. From fast food to coffee to car washes, franchising offers up the opportunity to build and grow a portfolio with a lot of potential for growth. And with the opportunity to operate independently, the idea of franchising becomes even more attractive.

However, every business endeavor comes with its own challenges and taking on a franchise should not be taken lightly. One challenge to look out for in any type of franchise is that of fraud, which can completely sideline a business owner looking to grow their franchising brand. Fraudulent opportunities are out there, and being able to know what to look out for before anything is signed or agreed upon is the first step in keeping everything above board and protected. Here’s a look at franchise fraud.

What is Franchise Fraud?

This kind of fraud comes out in many different ways, but more often than not it’s when misleading and fraudulent sales practices are used to entice prospective franchisees to purchase and invest in a franchise. False or misleading statements about projected financial performance has always been a surefire red alert when looking to invest in a franchise, so it’s important to ask for all financial performances over many years and locations. Reading the fine print will also help to put things in a clear picture so to avoid any small stipulations that are glossed over in discussions.

This is where franchise insurance comes in handy by financially backing up those who invest in its protection. A full-circle franchise insurance plan will provide the risk management needed to keep franchise owners safe from possible fraud.

Be On The Lookout

Some business owners have even had to take out home equity loans to cover their bills or invest more into the franchise they have taken on. Once franchise fraud has taken place, there is really only so much that can be done.

If the franchise opportunity sounds too good to be true, it might just be. Anything advertised as quick or easy usually isn’t, and should be investigated thoroughly. While setting up a franchise can be executed more easily than starting your own business from scratch, it doesn’t mean that there aren’t hiccups that can occur or should be looked out for.

Also, any sort of high-pressure sales tactics that rub the possible franchise owner the wrong way should be a huge red flag. If a franchise is good and solid, there shouldn’t be the need to be pushy as results will already be speaking for themselves.

Registering FDD

There are some states that require franchisors to register their financial disclosure documents. Verifying that the FDD is registered is a great sign that the franchisor is doing everything above board. Depending on which state you live in, check to see if this is required, and if it is, and they are not registered, this should set off some alarm bells.

It’s important to know what exactly can be at stake with dealing with a fraudulent franchisor. This can be the difference between starting up a legitimate franchise or having to deal with the financial loss of being taken advantage of. Knowing what to look out for, as well as what a state requires, can help to keep a new franchise safe.

About RMS Hospitality Group

At RMS Hospitality Group, our expertly crafted policies are written specifically for the hospitality industry. We offer custom tailored solutions to meet any venue’s specific needs. For more information, contact our knowledgeable experts today at (888) 359-8390.

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