Investigating a Franchise Opportunity: How a Little Detective Work and the Law can Help
by Caron_Beesley, Community Moderator
- Created: March 24, 2010, 12:00 am
- Updated: June 17, 2011, 10:51 am
How do you know when you’ve found the right franchise for you?
Maria Anton (www.growbizmedia.com*) is an expert in this area. She has outlined 10 Signs of a Great Franchise Opportunity* that include the following vital key indicators that will help you know when you’ve found the right franchise:
1. Industry growth
2. Unit growth
3. Strong support from the franchisor
4. Good management
5. Marketing and advertising support
6. Satisfied franchisees
7. Adequate earnings
8. Sound financial statements
10. A good fit
To determine how your chosen franchise stacks up against this list you’ll need to do some detective work.
The franchise sector is regulated by the Federal Trade Commission (FTC) and, in light of this, the government provides some useful resources and advice designed to help prospective franchisees evaluate and buy a franchise, while avoiding common scams.
Below is a summary of what the law requires to help you assess a franchise opportunity, as well as steps you can take yourself to assess a franchise opportunity:
Detailed Disclosure Document - It’s the Law!
As a general rule, the government requires that franchise owners (the franchiser) provide you with specific information so that you can make an informed decision - this is known as the Federal Trade Commission's Franchise and Business Opportunity Rule.
Key to this rule is the responsibility of franchisers to provide potential franchisees with a 'Detailed Disclosure Document' during the pre-sale stage. This is an essential piece of information that can provide valuable insight into your chosen franchise.
The detailed disclosure is required to contain the following:
- Contact information for at least 10 previous purchasers in your area
- An audited financial statement
- Executive profile information
- A true view of the business start up and maintenance costs
- An outline of respective franchisee and franchiser responsibilities
The document must be provided at least 10 business days before you pay any money or legally commit yourself to a purchase. If you have any doubts about whether a franchise owner is being less than forthcoming in sharing this information, the FTC provides a hotline for you to call: 1-877-FTC-HELP (877-382-4357).
Do Your Own Investigative Work to Assess a Franchise Opportunity
The law can help keep a franchiser honest, but there are some steps you can take on your own to assess a particular franchise opportunity.
- Put the Disclosure Document to Work for You - Once you’ve received the disclosure document from the franchise owner read through it and follow up with all the contacts and references that have been provided. It’s best to interview franchisees in person. Ask about their experiences and compare their responses to the statements in the disclosure document.
- Do the Potential Earnings Figures Stack Up? - Investigate whether claims about your potential earnings are genuine. You can do this by asking for a copy of the basis for these claims in writing. Again, this is something you can also gauge when you talk to existing franchisees.
- Check out Success Stories - The franchiser must tell you (in writing) the number and percentage of owners who been as successful as they claim you will be.
- CompareOpportunities - As with all business ventures, shop around. There are many online resources that offer to connect you with available franchise opportunities but you may want to check out the government-produced and authorized Franchise Opportunity Handbook* (published by the Department of Commerce), which lists companies that provide franchise opportunities.
- Don’t Give in to Sales Pressure - The FTC requires that a seller must wait at least 10 business days after giving you the required documents before accepting payment or a signed agreement.
- Compare the Contract to the Verbal Sales Pitch - Don’t sign any contract that doesn’t mirror the promises that have been made to you at the pre-sale pitch.
- Employ Professional Help - An attorney - preferably a specialist in franchise law - can help you evaluate the franchise package and tax considerations.You might even consider using an accountant to determine the full costs of purchasing and operating the business as well as assess your potential profit.
Get more information about evaluating franchise opportunities as well as your legal rights at Business.gov’s Franchise and Business Opportunities Guide, which will also tell you exactly what rules apply to the company selling you the franchise. The more you know about their requirements, the better informed you are when evaluating their opportunities.
- Buying a Franchise: A Strategic 101*.
- International Franchising Association* - IFA represents all aspects of the franchise community and works to protect, enhance and promote franchising.
- The Franchise King* - Rich with franchise information, resources, products, and services. If you are a prospective franchise owner, you’ll find the resources you need to help you lower your risk. If you are a franchisor, you’ll find great resources to help your franchise system continue to flourish.
- Buy a Franchise - Guides and Resources from the Small Business Administration.
- Allbusiness.com Franchise Guide* - Tips and advice including articles, videos, and business tools.
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