Buying A Franchise:
A Consumer Guide
... Continued From Previous Page
V. Investigating Before You Invest
The All-Important Disclosure Document
Before you invest in any franchise system, get a copy
of the franchisor’s disclosure document. Under the
Franchise Rule, which is enforced by the FTC, you
must receive the document at least 14 days before
you are asked to sign any contract or pay any money
to the franchisor or an affiliate of the franchisor. You
have the right to ask for—and get—a copy of the
disclosure document once the franchisor has received
your application and agreed to consider it. Indeed,
you may want to get a copy of the franchisor’s
disclosure document before incurring any expenses
to investigate the franchise offering.
The franchisor may give you a copy of its disclosure
document on paper, via email, through a web page,
or on a disc. The cover of the disclosure document
should have information about its availability in
other formats. Make sure you have a copy of the
document in a format that is convenient for you, and
keep a copy for reference.
Read the entire disclosure document. Don’t be shy
about asking for explanations, clarifications, and
answers to your questions before you invest. Among
the key sections in a complete disclosure document
are:
Franchisor’s Background
This section tells how long the franchisor has been
in business, likely competition, and any special
laws that pertain to the industry, like any license or
permit requirements. This will help you understand
the costs and risks you are likely to take on if you
purchase and operate the franchise.
Read the entire
disclosure document.
Don’t be shy about
asking for explanations,
clarifications, and
answers to your
questions before you
invest.
Business Background
This section identifies the executives of the franchise
system and describes their experience. Pay attention
to their general business backgrounds, their
experience in managing a franchise system, and how
long they’ve been with the company.
Litigation History
This section discusses prior litigation—whether the
franchisor or any of its executive officers have been
convicted of felonies involving fraud, violations of
franchise law, or unfair or deceptive practices law,
or are subject to any state or federal injunctions
involving similar misconduct. It also says whether
the franchisor or any of its executives have been held
liable for—or settled civil actions 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 its
performance.
This section also should say whether the franchisor
has sued any of its franchisees during the last year,
a disclosure that may indicate common types of
problems in the franchise system. For example, a
franchisor may sue franchisees for failing to pay
royalties, which could indicate that franchisees are
unsuccessful, and therefore, unable or unwilling to
make their royalty payments.
Bankruptcy
This section discloses whether the franchisor or
any of its executives have been involved in a recent
bankruptcy, information that can help you assess
the franchisor’s financial stability and whether the
company is capable of delivering the support services
it promises.
Initial and Ongoing Costs
This section describes the costs involved in starting
and operating a franchise, including deposits or
franchise fees that may be non-refundable, and costs
for initial inventory, signs, equipment, leases, or
rentals. It also explains ongoing costs, like royalties
and advertising fees. In addition, ask about:
- 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 a security system
- training
- legal fees
- financial and accounting advice
- insurance
- the costs of compliance with local ordinances,
such as zoning,
waste removal, and fire and other
safety codes
- health insurance
- employee salaries and benefits
Starting your business may take several months. Estimate your operating expenses for the first year and your personal living expenses for up to two years. Compare your estimates with what other franchisees have paid and with competing franchise systems. You may be able to get a better deal with another franchisor.An accountant can help you evaluate this information.
Restrictions
This section tells whether the franchisor limits:
- suppliers from whom you may purchase goods
- the goods or services you may offer for sale
- your customers
- where you can sell goods or services
- your use of the Internet to sell goods or services
to customers in and out of your territory and the
right of the franchisor (or other franchisees) to
use the Internet to solicit customers or to sell in
your territory
These kinds of restrictions may limit your ability to
exercise your own business judgment in operating
your outlet. That said, if the franchisor does not
limit the territory where each franchisee can sell, the
franchisor and other franchisees may compete with
you for the same customers, either by establishing
their own outlets, or by selling to customers in your
area through the Internet, catalogs, telemarketing,
and the like.
Terminations
This section spells out the conditions under which
the franchisor may end your franchise and your
obligations to the franchisor after termination. It
also defines the conditions under which you can
renew, sell, or assign your franchise to others.
Training
This section explains the franchisor’s training and
assistance program. Check for information about:
- who is eligible for training
- whether new employees are eligible for training
and,
if so, at what cost. Who pays?
- how long the training sessions take. How much
time is spent on technical training, business
management training, and marketing?
- who conducts the training and their qualifications
- whether the company offers ongoing training and
at what cost
- support staff available for trouble-shooting:
Are they assigned to your area and how many
franchisees they are responsible for?
- whether on-site individual assistance is available
and at what cost
The training you need will depend on your business
experience and your knowledge of the franchisor’s
goods and services. If you have doubts about
whether the training offered is sufficient to give you
the tools you need to handle day-to-day business
operations, consider another franchise opportunity.
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