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Investigating the Franchise

Buying a franchise, like making any other major purchase, should involve a thorough investigation. The time spent investigating the franchise, the industry, and the market will make you confident that your decision to buy (or not to buy) was the right decision.

What to Look For

In general, a prospective franchise should have an established reputation, sufficient capital, high-quality products or services, and satisfied franchisees.

A reference list of current and former franchisees should be available from the franchisor. (If a reference list isn't available, be cautious!) Try to determine whether the franchisor is attempting to expand the number of franchisees as quickly as possible (which may be at the expense of existing franchisees).

Try to answer as many of these questions as you can when considering a franchise:

  • Is there a prototype location that is the basis for the franchising operation?
  • Is the franchise too dependent on the founders of the franchise?
  • Is there a strong management team of officers, directors, and consultants who understand the industry and the use of franchising as a means of expanding the business?
  • Is there enough capital to support the franchising program and provide assistance to franchisees?
  • Is there a recognized and distinctive trade identity that is a registered trademark? Does the franchise have a uniform trade appearance and overall image?
  • Are there methods of operation and management that are proven? Have they been incorporated into an operating manual?
  • Is there a comprehensive training program for franchisees?
  • Is there support staff that can visit and assist franchisees?
  • Is there support staff that can monitor and enforce quality control standards?
  • Are there legal documents that reflect the franchise's history, strategy, and policies?
  • Is there a strong market for the products or services that the franchise offers?
  • Are there site selection criteria based on market studies and demographic reports?
  • Does the franchisor have a record of refusing to renew the franchise if a new franchisee is particularly successful so it can take over the operation itself?

Keep in mind that this is not an exhaustive list of items to investigate. It's a starting point that identifies the main items to investigate.

Where to Look

A franchisor can send you something called offering documents, which is a package of documents that the franchisor must provide to prospective franchisees. According to federal law, the offering documents must be given to the prospective franchisee at the first meeting between the franchisor and the franchisee where the purchase of a franchise is seriously discussed. In any event, the offering documents must be given to the prospective franchisee no later than 10 days before the franchise agreement is signed or before any cash is paid.

The federal government, as well most state governments, have rules and regulations regarding the content of the offering documents. The federal government approved a new format, called the Uniform Franchise Offering Circular (UFOC), that has been adopted by virtually every state. It requires offering documents to be written in "plain English." The UFOC and other offering documents include the following information:

  • The history of the franchise
  • The history of its owners
  • Procedures for terminating and renewing the franchise relationship
  • Quality controls
  • Fee structures
  • Financial statements

Franchise Agreement

A franchise agreement is a contract between the franchisor and the franchisee. The agreement should balance the interests of the parties. However, in reality, if the franchise is a well-known organization like McDonald's Corporation, the franchise agreement is going to be very favorable to the franchisor, and you more or less have to take it or leave it. If the franchise is more obscure, you'll have more opportunity to negotiate favorable terms for yourself.

There really is no such thing as a standard franchise agreement because each contract will be drafted to suit the individual situation. However, there are some basic terms that pertain to the franchisor and franchisee in most franchise agreements.

Business Tools

A checklist of basic terms that may be included in a franchise agreement has been included in the Business Tools area. A review of the checklist will give you a thorough grasp of the issues that need to be addressed in a franchise agreement.

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