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Investigating a Franchise Opportunity: How a Little Detective Work and the Law can Help

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Investigating a Franchise Opportunity: How a Little Detective Work and the Law can Help

By Caron_Beesley, Contributor
Published: March 24, 2010 Updated: June 17, 2011

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
9. Honesty
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.

Additional Resources

* Links to a non-government website.
 
 
Message Edited by CaronBee on 05-28-2009 07:49 AM
Message Edited by CaronBee on 06-01-2009 04:04 PM

About the Author:

Caron_Beesley
Caron Beesley

Contributor

Caron Beesley is a small business owner, a writer, and marketing communications consultant. Caron works with the SBA.gov team to promote essential government resources that help entrepreneurs and small business owners start-up, grow and succeed. Follow Caron on Twitter: @caronbeesley

Comments:

I almost bought a franchise without doing any due diligence and after reading this article I have realized there is a lot more to buying a franchise then the great opportunities it offers. Do your research people, don't buy blindly or based on speculations.
When choosing a franchise you absolutely must choose one based on your skills and culture NOT on products you like to sell. Remember most likely you will not be working in the business forever, you will want to work ON the business.
Really good article that covers a lot of what you need to know from the very outset when considering a franchise. Very useful for people starting out , and something i have considered myself at times.
It is good to have websites like this and forums where you can get great resourceful information for individual small business owners.
One of the best "Franchising" opportunities with, by far, the lowest start-up costs is direct sales or Network Marketing. I owned two businesses before discovering the Netowrk Marketing industry and leverage. With the previous two businesses I was trading my time for money - which limits your income. When I discovered Network Marketing I learned about leverage and was able to earn over five figures per month within my first two years in the business. The key is to do your research and find a company with experienced management, great products, and low level of debt, and that is a good fit with your interests and passion. These are exactly the things the author above has recommended to look for, and they are the keys to long term success in any business franchise. Check out my web site to learn more. All the best to your success, Jackie
his is my first time pay a quick visit at here and i am genuinely pleassant to read everthing at one place.
The great thing about franchises is that they are already established companies. You don't have to wonder if they will work or not.
Terrific! That's good to know, I'm glad I've gone pass this site before I work on my penny stocks site, truely amazing opportunity to read posts like this.
The benefit of working with a franchise organization is that they can eliminate those that will not fit, saving you an enormous amount of time and energy. Using a model they have created for you based on what they’ve learned through the survey questions and many other related firms, they will search their inventory of franchise companies to find those who fit your financial criteria, have available territory in your area, and are most likely to help you reach your financial and lifestyle goals.
I think doing your homework on your own is a great place to start to see if it is really in your best interest to pursue, but before making the big "leap" and going all in, I would suggest hiring not only a lawyer, but talk to a financial adviser in the matter. A little cost now could potentially save lots of time and money in the long run. Jm2c

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