Do Your Homework

Before you jump into a franchise agreement, be sure you've done extensive research on the franchisor

You want to start a business, but you also want to avoid the risk associated with an untested idea. You've decided that you want the advantages of an established name, and can live with the detailed rules and prescriptions of a franchisor. Now how do you choose a franchise that best fits your talents and interests?

There are literally hundreds of franchises available in almost every major consumer industry. Fast food retailers like McDonalds, Burger King, Wendy's, Carvel, Dairy Queen, and Dunkin' Donuts may be the most familiar, but franchise opportunities exist in industries as diverse as tax preparation, computer repair, medical billing, home renovation, interior design, commercial cleaning, home health care and nursing, and health and fitness. According to FranchiseConsultants.com, there are more than 2,300 franchises currently available in the U.S. In fact, there are so many franchise opportunities available that the choices can be bewildering.

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According to Mike Duessler, a Boston-based business consultant, the choice of franchise begins with you. "You need to find something that you are comfortable doing," he says. "And that may be different from what you think you'd like to do." Duessler suggests taking a job in a similar type of establishment, or even at an outlet of the franchise you are considering before you invest in your own store. "You may think that running a coffee shop is a lot more interesting than that nine-to-five office job you currently have," he warns, "but if you've never run a coffee shop or any type of shop before you may find your expectations are really far off the mark." The more familiar you are with the type of operation you are considering the better off you will be when choosing between franchise opportunities. Working at an outlet of the franchise you are interested in also gives you an insider's perspective on how the franchisor operates. "Do they provide support to their franchisees? Do they provide quality products? How strictly do they regulate their franchisees? The best way to get a firm answer to these questions is to work inside a franchise and see what goes on every day," he adds.

 

Once you've narrowed down the type of franchise in which you'd like to invest, how do you choose between the various franchise offerings in that field? There are a number of considerations, according to Michael Klein, a franchise attorney. "Look for recognizable names, since they will draw the most customers," he says. "Chances are, if you've never heard of the franchise, most of your potential customers won't have either." The more recognizable the franchise name, of course, the higher the initial investment will likely be. "Still, a well known name usually means a track record of success," Klein says. "Or, at worst, it will make researching the franchise's problems easier since bigger names get more media attention."

 

When researching any prospective franchise, look for any past litigation, especially from former franchisees. The presence of litigation against a franchisor isn't necessarily a sign that the franchise isn't worth pursuing," Klein says, noting lawsuits are commonplace for large businesses. However, watch for large numbers of similar type lawsuits, which could reveal a widespread problem with the franchisor's behavior.

 

The most important item in determining whether a franchise opportunity is a good deal for you is the Uniform Franchise Offering Circular (UFOC). The Federal Trade Commission (FTC) requires that a franchisor provide any prospective franchisee a copy of its UFOC within ten days prior to the signing of any contract, or at the first face-to-face meeting between franchisor and franchisee. The UFOC is a standardized disclosure form that describes the franchise in considerable detail, including all policies and requirements applicable to franchisees. The UFOC also must provide audited financial statements from the franchisor and copies of the franchise contract. "Take your time reviewing the UFOC," advises franchise attorney Mario L. Herman. "Compare the claims made in any promotional materials the franchisor has provided against the financial statements in the UFOC and ask about any discrepancies." Herman also suggests contacting current franchisees listed in the UFOC and inquiring if they would invest in the franchise again. "Of course, if they are current franchisees, they may not be inclined to speak negatively of the franchisor, but they may still offer useful information," he adds. Additionally, Herman advises trying to locate former franchisees to ask why they left the franchise. Herman suggests contacting the FTC to see if there have been any complaints filed against the franchisor.

 

Be sure to look for Part III of this article, which will explore the financial realities of the franchise business and offer realistic assessments of the cost of entry associated with the various business franchise categories.

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