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A Consumer Guide to Buying a Franchise
- Business Background
- The disclosure document identifies the executives of the franchise
system and describes their prior experience. Consider not only their
general business background, but their experience in managing a
franchise system. Also consider how long they have been with the
company. Investing with an inexperienced franchisor may be riskier
than investing with an experienced one.
- Litigation History
- The disclosure document helps you assess the background of the
franchisor and its executives by requiring the disclosure of prior
litigation. The disclosure document tells you if the franchisor, or
any of its executive officers, has been convicted of felonies
involving, for example, fraud, any violation of franchise law or
unfair or deceptive practices law, or are subject to any state or
federal injunctions involving similar misconduct. It also will tell
you if the franchisor, or any of its executives, has been held liable
or settled a civil action involving the franchise relationship. A
number of claims against the franchisor may indicate that it has not
performed according to its agreements, or, at the very least, that
franchisees have been dissatisfied with the franchisor's performance.
Be aware that some franchisors may try to conceal an executive's
litigation history by removing the individual's name from their
disclosure documents.
- Bankruptcy
- The disclosure document tells you if the franchisor or any of its executives have recently been involved in a bankruptcy. This will help you to assess the franchisor's financial stability and general business acumen and predict if the company is financially capable of delivering promised support services.
- Costs
- The disclosure document tells you the costs involved to start one of
the company's franchises. It will describe any initial deposit or
franchise fee, which may be non-refundable, and costs for initial
inventory, signs, equipment, leases, or rentals. Be aware that there
may be other undisclosed costs. The following checklist will help you
ask about potential costs to you as a franchisee.
- Continuing royalty payments.
- Advertising payments, both to local and national advertising funds.
- Grand opening or other initial business promotions.
- Business or operating licenses.
- Product or service supply costs.
- Real estate and leasehold improvements.
- Discretionary equipment such as a computer system or business alarm system.
- Training.
- Legal fees.
- Financial and accounting advice.
- Insurance.
- Compliance with local ordinances, such as zoning, waste removal, and fire and other safety codes.
- Health insurance.
- Employee salaries and benefits.
It may take several months or longer to get your business started. Consider in your total cost estimate operating expenses for the first year and personal living expenses for up to two years. Compare your estimates with what other franchisees have paid and with competing franchise systems. Perhaps you can get a better deal with another franchisor. An accountant can help you to evaluate this information.
- Restrictions
- Your franchisor may restrict how you operate your outlet. The
disclosure document tells you if the franchisor limits:
- The supplier of goods from whom you may purchase.
- The goods or services you may offer for sale.
- The customers to whom you can offer goods or services.
- The territory in which you can sell goods or services.
Understand that restrictions such as these may significantly limit your ability to exercise your own business judgment in operating your outlet.
Investigating Franchise Offerings
Before investing in any franchise system, be sure to get a copy of the
franchisor's disclosure document. Sometimes this document is called a
Franchise Offering Circular. Under the FTC's Franchise Rule, you must
receive the document at least 10 business days before you are asked to
sign any contract or pay any money to the franchisor. You should read the
entire disclosure document. Make sure you understand all of the
provisions. The following outline will help you to understand key
provisions of typical disclosure documents. It also will help you ask
questions about the disclosures. Get a clarification or answer to your
concerns before you invest.
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_________________________________ Table of Contents The Benefits and
Responsibilities Before Selecting
a Your Ability to Training
and Support Services Investigating
Franchise Terminations
Training Current and
Former
Source: Federal Trade Commission
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