Franchising

Conduct Research

The FTC suggests conducting thorough research prior to investing in a franchise. Find answers to the following questions before making a decision to go into business with a franchisor.

• How many years has the franchisor been in operation?
• Is the franchisor a corporation with an experienced management that is well trained?
• What is the total investment the franchisor requires from the franchisee?
• Does the franchisor provide financing? If so, what are the terms?
• Has the franchisor given information regarding actual, average or forecasted sales, profits and earnings?
• Will the franchisor provide with the success rates of existing franchisees and their names and locations?
• What is the extent of the training the franchisor will provide?
• Does the franchisor investigate all potential franchisees carefully to ensure they can successfully operate the franchise and help grow the franchise?
• Has the franchisor complied with FTC and state disclosure laws?
• Does the franchisor have a reputation for honesty and fair dealing?
• What is the franchisor’s experience in relation to past litigation or prior bankruptcies?
• Exactly what can the franchisor do for you that you cannot do for yourself?

In addition to reading the company’s disclosure document and speaking with current and former franchisees, potential franchisees should examine the following:

Lawyers and Accountants. Investing in a franchise is costly, and an accountant can help you understand the company’s financial statements, develop a business plan, and assess any earnings projections and the assumptions upon which they are based. An accountant can help you pick a franchise that is best suited to your investment resources and goals.

Franchise contracts usually are long and complex. A contract problem that arises after you have signed the contract may be impossible or very expensive to fix. A lawyer will help you understand your obligations under the contract so you will not be surprised later. Choose a lawyer experienced in franchise matters.

Banks and Other Financial Institutions. These organizations may provide an unbiased view of the franchise opportunity you are considering. Your banker should be able to get a Dun and Bradstreet report or similar report on the franchisor.

Better Business Bureau. Check with the local Better Business Bureau in the cities where the franchisor has its headquarters. Ask if any consumers have complained about the company’s products, services or personnel.

Government Departments. Several states regulate the sale of franchises. Check with your state division of securities or attorney general’s office for more information about your rights as a franchise owner in your state.

Federal Trade Commission. The FTC works for the consumer to prevent fraudulent, deceptive and unfair business practices in the marketplace and to provide information to help consumers spot, stop and avoid them. The FTC publishes other information that may be of interest to you, including business guides such as Getting Business Credit and Buying by Phone.