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  • Writer's pictureCrystal Lizama, CFE

High-Risk Franchise Systems

High-risk franchise systems are franchise opportunities that may have a higher level of risk for potential franchisees, compared to other franchise opportunities. High-risk franchise systems can be characterized by a number of factors, such as a lack of established brand recognition, high termination amounts listed in the FDD, FDD Item 3 litigation record with franchises, an untested or unproven business model, limited support and resources provided to franchisees.

While the potential rewards of a successful high-risk franchise can be significant (such as investing in an emerging brand and being able to jump in early into a new market), there is also a higher level of uncertainty and potential for failure compared to more established and proven franchise systems. Potential franchisees must carefully evaluate the risks and rewards of a high-risk franchise before deciding to invest.

While high-risk franchise systems can be viewed with caution, they can also offer potential franchisees the opportunity to be among the first to enter a new or emerging market or capitalize on a unique or innovative business idea. For potential franchisees with the necessary skills, expertise, and risk tolerance, a high-risk franchise can provide a unique and potentially rewarding opportunity to launch and grow their own business.

Red Flags To Look For:

If you notice a lot of terminations in the franchise disclosure document, and multiple pages of FDD-listed litigation in Item 3, please take note and find a reputable franchise attorney to help you navigate the document. You may also want to consider using a franchise broker, or consultant as well to gain more insight into the system.

Additional Tips:

  • Search the brand online in your local area and see what comes up. Do you see any legal, criminal, or other issues and complaints?

  • Take a look at any online franchise magazines such as Franchise Times. Are there any recent articles regarding legal issues with franchisees?

  • Search each owner, board member, and team member on the FDD. Take a look at their experience and tenure. Do they have franchise experience? If so, what brands have they been part of? Are those successful brands?

  • Try to figure out the franchisor's experience and make an evaluation. You want to work with a team with experience BUT what does that mean? I suggest asking the franchisor, "who will I be working with on a daily, weekly, or quarterly basis?" what is their name and what is their background? (Typically, you will not be communicating daily with the CEO, COO, CDO, CTO as you did in the Discovery Day (sales/awarding process). You may be passed off to another team member for franchisee onboarding.

Overall, high-risk franchise systems can be a risky proposition for potential franchisees, but they can also offer unique opportunities and potential rewards for those willing and able to take on the challenges and risks associated with a high-risk franchise. Potential franchisees should carefully evaluate the risks and potential rewards of a high-risk franchise before making a decision to invest. Try using some of the tips above and take your time when evaluating new or established concepts.

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