Franchise Scams: Your Side Hustle Could Actually Cost You Thousands of Dollars

Side hustles have taken off in the past few years. According to a recent Index by Pinger study, a whopping 67% of Americans have a small business, a side hustle, or do freelance work. Franchises -- buying the license to operate under an existing brand -- are just one of many ways to earn extra income outside of your main job. But they are often more complicated than, say, food delivery or online tutoring.

When you set up a franchise, you are essentially running a business under someone else's brand and model. It can be a lot of work and often requires serious investment in terms of time and money. According to Franchise Business Review, the minimum investment required for some franchises is around $3,500 while others can require $50,000 or more.

On the plus side, the brand already exists and you'll get training and marketing support, which can make a big difference to a fledgling enterprise. But it is a lot of money to lay out. Particularly as some franchises are not all they're cracked up to be. If you're planning a franchise side hustle, it's important to do a lot of research and proceed with caution. Not only will this help you avoid scams, but you can also pass up on businesses that won't work for you.

Franchises aren't always everything they promise

People made around 5,900 franchise-related complaints to the FTC between 2018 to 2022, according to the U.S. Government Accountability Office. However, it believes this number is only the tip of the iceberg as it says many franchises aren't aware of the protections available to them.

A recent Bloomberg article highlighted the issues around one franchise chain, Xponential. It says a number of former and existing franchises told Businessweek that the company had misled them. Some are taking legal action against the chain. The article said some of the 3,000 franchises were "bleeding money." Xponential rejects the accusations.

Without getting too deep into the accusations, the case highlights the risks involved in opening a franchise. Bloomberg says the marketing team sometimes encouraged potential owners to take out loans or roll over their 401(k)s to fund the deal. If the business doesn't perform as well as you hope it might, your side hustle could cost you money and eat into the money you need for your retirement years.

Make sure a franchise is right for you

If you're considering running a franchise as a side hustle, make sure you know exactly what you are getting into. Research, research, and then research some more. The FTC has an excellent guide that's packed with information. Its Franchise Rule gives you some protection against unscrupulous players, as it requires the seller to disclose a bunch of key information about the business.

If you're able to talk to someone who is already running a franchise from the same chain, so much the better. Make sure you understand the time and money you'll need to commit. Franchises can be a lot of work and it may be difficult to juggle the work alongside your main nine to five. Some franchises hire managers to do the day-to-day work, but that absentee model relies heavily on finding the right people. That's a challenge for many small businesses.

Financially speaking, try to map out the best- and worst-case scenarios, particularly if you're borrowing money or dipping into your retirement savings. Bear in mind that while you may hope to break even within three or even six months, it could take a year (or more). Be as realistic as you can about the upfront and ongoing fees and other costs. You may need to have a good chunk of money in your bank account to keep you going until your side hustle franchise turns a profit.

Look at the requirements the brand owner might put on you. For example, you might need to spend a certain amount on advertising, open a store in a specific location, or use particular suppliers. All of these things can have a significant impact on your bottom line.

There are a lot of conflicting statistics about the success rate of franchises, but -- like small businesses -- there is a risk your franchise may fail. Consider how you will cope financially if things don't go as you hope. It's one thing to lose a freelance gig, and quite another to lose a business you've invested thousands of dollars in.

Spotting a franchise scam

Treat your potential franchise side hustle as any other investment opportunity. Be wary of heavy sales techniques and anyone who demands money upfront. If the numbers seem vague or don't add up, treat this as a major red flag.

Research the people involved in the franchise as well. If you find negative headlines about the big bosses when you do a bit of digging, that does not bode well. Be suspicious of any brand that feels like a get-rich-quick scheme. If someone's saying you can make a lot of money with no work, it's almost certainly too good to be true.

Depending on your situation, a franchise side hustle could be a great way to get an extra income stream. Just make sure you understand the risks and costs involved before you commit.