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Spotting fake franchise opportunities

Written by Richard Holden on Friday, 04 July 2014. Posted in Finance

Richard Holden, head of franchising at Lloyds Banking Group, sheds light on how budding franchisees can avoid scams and invest in a genuine business opportunity

Spotting fake franchise opportunities

The economic recovery is creating new jobs across the UK and the government is reporting a gradual fall in unemployment. Despite this, wage increases are for many still lagging behind inflation and figures show more people are now choosing to be their own boss and start up a new business. Many budding entrepreneurs up and down the country are looking to achieve their dreams by turning their new business ideas into money-making opportunities and generating numerous business opportunities for aspiring owners to buy into.

But how can you spot a legitimate business opportunity from a scam? Unfortunately, many websites and classified ads promote what amount to business scams alongside genuine business and franchise opportunities. This makes it tricky for the investor to simply identify a true opportunity with an epidemic of scams looking to take advantage of the aspirations of would-be entrepreneurs. It is not always easy to spot a scam, so to minimise the risk of falling prey to these rogue traders it is absolutely essential to undertake thorough research before embarking on any new business opportunity.

There is truth in the old saying ‘if it seems too good to be true, it probably is’. Some of the most frequent, rarely proven, claims which should be treated with caution are:

● Huge profits, no competition, low level investment

● Work no more than 20 hours per week and earn £50k + per year

● Run your own business, no experience needed, money back guaranteed

● Earn great profits and do it all from home with total flexibility

● No fees, absolute best products available anywhere

● The ability to earn a substantial income working from home

These promised returns rarely materialise and investors can get stuck holding worthless stock they are unable to sell. The fact is that there are no shortcuts to wealth – the only people likely to make money in these situations are the fraudsters.

Aspiring business owners need to apply lots of common sense when researching potential business opportunities. A good place to start your search is with fully proven franchise brands that are based on years of experience and a tried and tested business model. There is a reason why well-established franchises are successful – franchising is ultimately the duplication of a proven business model with initial training and ongoing support delivered by the franchisor.

In addition to a track record of success, a well-established franchise can also provide the investor with a known brand name, national account contracts and better supplier terms. The advantage of training and support should not be overlooked by budding investors either. Having someone that can share their many years of experience operating a similar business and prevent you from making costly mistakes is a real and significant benefit for any franchise owner.

Compare this to the scam option, which often involves the investor parting with significant cash up front for little more than some stock and a manual which gives them limited, if any, instruction. 

Whether you are looking at a standalone business opportunity or joining a proven franchise brand, any investment requires thorough research and careful evaluation before you make any significant commitment.

One essential piece of research is to speak to as many existing franchisees or investors as possible. It is likely that a franchisor will want to manage that process, so its franchisee network is not bombarded with enquiries from potential investors. But don’t let them cherry pick who you speak to. Try to speak to a selection of franchisees, including some of the best and worst performers to help you determine what is required to make the opportunity work.

You may also wish to speak to someone who has recently established their business – they will have just gone through the same process as you so their experience will be invaluable. It is also worth speaking to franchisees who are more established and who have moved past the start-up stage. They will be able to point out some of the pitfalls to avoid and where you can expect your own business to be a few years down the line.

Of course, franchising is not right for everyone. For people who value independence or want to run a business without restrictions, franchising might not be the best bet. Franchising is not an easy business option and investors need to go in with their eyes wide open. If you have done your research, considered all the alternatives, taken the right professional guidance and decided that franchising is the best way forward for you, then there is every opportunity to benefit from your chosen franchise for many years to come.

Spotting a scam

To help would-be business owners navigate what is often a tricky path in the early days of  researching new opportunities, these handy guidelines may help:

● If it looks too good to be true, it probably is

● Beware of promises of guaranteed or very large returns

● Look out for being sold goods or services with little or doubtful value

● Beware of offers to teach you ‘secret’ or ‘exclusive’ techniques for building wealth

● Avoid advertisers who state ‘this is not a pyramid scheme’ or ‘this is totally legal’

● Never be pressured into making decisionsabout the investment

● Always investigate schemes carefully before you agree to invest

● Avoid fad industries that won’t be around in a few years’ time

● Ensure that you actually visit the head office business premises before you commit

● Always speak to existing investors and thoroughly check all testimonials and references

● Seek independent legal, financial or other professional advice before parting with money 

About the Author

Richard Holden

Richard Holden heads up the Lloyds Banking Group Franchise Unit and is an expert speaker at exhibitions and seminars.

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