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How to Spot Fly-by-Night Franchises

By: By Giuli Osso
Date: 2008/11/19

Rarely does a get-rich-quick-scheme work and franchising, perhaps because of its high profile and strong reputation and the relative ease with which it can be duplicated, is one of the business sectors that is often open to fly-by-night franchisors. Entrepreneurs, beware.

Man’s trusting and often gullible nature is at the core of why prospective business operators are taken in by the fly-by-night operators. Judging by the host of scams that appear in our e-mail inboxes offering get-rich-quick schemes and the many reports of unscrupulous operators, there are a whole lot of people out there who are corrupt enough to take advantage of others and enough gullible people who will fall for the chance to make a quick buck.

The bottom line; rarely does a get-rich-quick-scheme work and franchising, perhaps because of its high profile and strong reputation and the relative ease with which it can be duplicated, is one of the business sectors that is often open to fly-by-night franchisors.

Mention the word franchising and you will get a range of reactions from it being the “miracle cure” for all business ills to those who believe it to be “the greatest con of all time.” According to franchise consultant Eric Parker, of Franchising Plus, the reputation of franchising is poor worldwide and ignorance on franchising opens people up to being taken for a ride.

“Franchising has great potential, nowhere more so than in South Africa where entrepreneurship development and job creation are national imperatives. The realization of franchising’s potential depends not only on correct implementation by those setting up franchising but also by educating those buying into a franchise concept,” says Eric.

Statistics often claim, quite rightly so, that when purchasing a franchise, you are more likely to find greater success than going into business as an independent. Whereas independent business have an 80% chance of failure in the first five years, franchise failure is under 20%. However, the buyer must always remember that there are risks involved, and that they can reduce them if proper homework is done.

Kobus Oosthuizen, FASA’s current Chairman and franchise consultant who, in his time has been both a franchisee and franchisor, believes that with the increasing public awareness that franchising enjoys throughout Southern Africa, a number of charlatans have entered the industry over the years, their sole intention being to take advantage of the uninformed business person wishing to invest in a franchise. “Fly-by-nights are clever and often operate under the radar” says Oosthuizen.

“As a prospective franchisee, you need to be able to pick up the subtle signs that give out warning signals, such as the fact that these franchisors are often eager to collect deposits before proper interview and profile testing of franchisees is done. Incomplete or non-existent disclosure documents, specifically regarding details of terminated agreements should be a warning sign, as is a franchisor not being able to supply comprehensive details on performance (turnover and viability) of its first stores.”

According to Lindy Barbour, Managing Director of Franchising Plus, one of the leading franchise consultancies in South Africa, prospective franchise buyers should keep the adage, “if it sounds too good to be true – generally it is” in mind when investigating franchise opportunities.

“Guaranteed promises of unreasonably high profits should be a warning sign and a franchisor with no pilot operation on the ground does not fit the franchise shoe of a 'proven business system'. A long list of promised ongoing support initiatives without the franchisor infrastructure to match is also a red light.”

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