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The idea behind franchising is to help a franchisor expand his company. But franchisees also have power . And it’s at the beginning of your relationship with the franchisor — when the potential match-making is still going on — that you as the potential purchaser of a franchise have the most leverage.
This is where the process of “due diligence” comes in. Before you invest tens or even hundreds of thousands of dollars in the “next McDonalds,” you must conduct due diligence to make sure that this franchisor will be able to keep its promises. And while you can probably count on the integrity of the people behind the Golden Arches, for example, it can be a much more difficult call with one of the many new franchising companies that are popping up.
“Time is really on the side of the franchisee as these relationships are coming together,” says Brent Eckersley, an associate of Hale Lane, a law firm in Las Vegas that specializes in franchising. “You need to do your due diligence and take your time. There is no pressure on you to make a closing. But it’s ‘buyer beware’ in this business, so you need to know what risk you’re taking if you’re going to buy a franchise .”
And believe it or not, most franchisors would rather that you discover there isn’t a good fit for you before you sign their contract rather than after. “It takes 10 times as much effort and money to get the wrong person out of a franchise fit than to prevent it in the first place,” says Carlton Morris, managing director for North and South America for The Cruising Club, an Australia-based franchisor of fractional boat ownership.
Here are three ways to help select a franchisor wisely:
Start with the obvious
Before you get to the practical and legal safeguards in this process, take a good, hard, common-sense approach to the franchisor’s basic proposition. Based on what you know and understand about the world, economic and social trends, American culture, the industry you’ve been in, and input from associates – does this franchisor’s product or service look like a sure-fire winner? Does its business model make sense for how you see the world today and project it to tomorrow? Are there several franchise alternatives within an industry you’ve targeted? If the franchisor is selling pet rocks or serving Atkins Diet food, for example, you’ll want to run the other way!
Also, urges the International Franchise Association, evaluate how this franchise would fit your lifestyle and personality . “The key to franchising is following an operating plan, so it may not be right for an entrepreneur ” who wants to follow his or her own innovative ideas, the association says. And if you’re sure franchising is for you, with each franchisor you’re considering, keenly understand the required investment level, your continuing financial obligations to the franchisor, training programs and support networks. It’s smart to hire an attorney, accountant or business consultant to help you make the choice.
Read the Uniform Franchise Offering Circular
The Federal Trade Commission requires a standardized document for how a franchisor goes about offering franchises, similar to how what the government requires of companies offering stock to the public. It’s called the Uniform Franchise Offering Circular, and it contains 20 categories of information about a company, such as investment costs, background on key executives and a list of the systems’ current and former franchisees. The UFOC also will tell you the circumstances behind any “terminated” franchise – whether it was sold, for example, or the franchisor cut off the franchisee – and whether there is any significant litigation recently completed or currently pending against the franchisor. In addition, 15 states require franchise companies to file or register with a state agency, and those fillings also will contain similarly valuable information.
Look for signs of trouble
Besides the UFOC, there are lots of ways to ferret out information, both good and bad, about a franchisor. Conducting an online search, obviously, is one way. If a franchisor is in trouble or not getting along with some of its existing franchisees for some reason, the news and the internet will be full of information about the tensions. Subway, for example, got into a big tiff in early 2006 because the franchisor tried to assert more power over its $400-million national advertising account in a new franchise contract, and many of its franchisees objected.
Our Bottom Line
When you buy a franchise, you’re counting on the resources and integrity of a franchisor in addition to what you bring to the table. So it’s crucial that you investigate them to the max. With the research tools that are available, you should be able to find out everything you need to know before making this big decision.