Investigation Is Key In Choosing a Franchise
By Geoffrey Stebbins

Most franchise companies are honest and ethical businesses, putting all their resources to work to enable their franchisees to maximize their profits. However, as in any industry, some franchise companies can be less efficient or ethical than others. Even among the better franchise companies, each one will not offer the same level of support to its franchisees. It is therefore most important for any potential franchise investor to check out the franchisor as thoroughly as possible and do his or her due diligence.

Five key components of this investigation should include an interview with the franchisor, a careful review of the Uniform Franchise Offering Circular, discussions with existing franchisees, discussions with past franchisees who are no longer in the system and a check with your state attorney general's office to see if any complaints are registered against the franchisor.

Many franchisors have already implemented programs to allow potential investors to visit with them at their home office. Some franchisors even grant incentives, such as sharing in the travel expense. This is certainly a very good way to get to know the franchise company. However, the franchisor's intent is usually to promote the sale of its franchises. Your intent at such a meeting should certainly be more toward investigating the company rather than being sold a franchise. If the meeting takes place on a group basis with several staff members, you might wish to see if you can secure a little private time with each of the key players on a one-to-one basis.

At these private interviews, you should seek to determine whether each of the key players has the expertise required, as well as the ability to communicate that expertise to your level of comfort. Be wary of presentations based purely on "plans for the future." Even though these may be interesting, they are not enough of a reason to justify buying the franchise. Pay more attention to the programs already in place that will be available to you if you join the system. Ask yourself what you will be getting for your money when you evaluate these programs.

At the meeting with the franchisor or prior to it, you must have been provided with a disclosure statement. Franchising in the United States is regulated by individual

states and by the Federal Trade Commission (FTC). Franchisors are required to provide prospective franchisees with a disclosure statement, which often takes the form of a Uniform Franchise Offering Circular (UFOC). Franchisors are bound to disclose important material information about their companies in the UFOC, and new regulations require that this information be presented in plain English with easy-to-read tables.

The new requirements provide franchisees a better idea of who is involved in the company, its history and background and any legal disputes in which the franchisor may have been involved. Any earnings claims statements in the UFOC have to meet certain guidelines and are useful tools to evaluate your earnings potential with that company.

Unfortunately, many franchisors choose not to make any claims in the UFOC. If a franchisor has not made an earnings claim in the UFOC, then any other earnings projections given outside of that document represent a circumvention of FTC regulations and should be considered suspect.

People tend to think that a UFOC, in compliance with FTC requirements or in accordance with state regulations, acts as an endorsement or standard approval. This is a complete misconception. There is no government endorsement, and in the case of non-registration states the document may not even have been seen by a government official. Therefore, it is very important for a serious investor to retain the advice of an attorney for a legal opinion on the franchise agreement, which normally accompanies the UFOC.

I emphasize "legal opinion," as in recent times a number of professionals have begun looking to expand their sphere of influence--sometimes into areas for which they are not properly trained. No one is better than your attorney to give you legal advice on the legal documentation. However, unless he has a marketing degree, business degree or accounting degree, he should avoid giving advice on marketing, general business, or accounting aspects of the franchise. Other professionals are available for these individual disciplines, or a franchise consultant may be qualified to handle all of these areas.

A list of all existing franchisees of the franchisor should be made available in the UFOC. I would certainly recommend that you speak with a few personally and many by phone. Remember, their time is important to them, and most of the time they are not getting paid for the advice they are giving. Be a little apprehensive and aware of those that request your name, address and phone number, because they may be submitting this information to the corporate office in order to receive payment for their time. As such, these may be biased reports. If suspicious, ask point-blank if they receive reimbursement for talking with you. Always preface your remarks by asking if it is convenient to talk now or would some other time be more convenient. Such demonstrations of courtesy can help to extract maximum cooperation.

Now using the information you gathered from your interview with the franchisor, you can verify if the franchisor is providing the services promised: site assistance, lease negotiation, training--whatever they might be. You can also determine the quality of the services provided, the franchisor's timely delivery of supplies, fixtures, inventory, accessories, etc., and its success in resolving any associated problems. Ask about marketing and advertising support, grand opening costs, the existing franchisee's general level of happiness with the franchisor and whether the franchisee would you this franchise.

Don't expect franchisees to tell you how much they are earning; they don't know who you are, and any request for this information may be seen as an invasion of their privacy. Rather, you can ask their opinion, based on their experience operating this franchise, if they feel it is feasible for a person to earn some specific dollar amount. Most of this interview can be conducted by telephone with a good number of franchisees. However, I still think it is important to visit one or two franchise locations personally to see the operation at hand.

Names and addresses of past franchisees that have left the system can be provided by the franchisor, based upon their last known address. It is certainly worth your while to see if you can search out these people to find the reason that they left the system. It is very important to recognize that such people may be negative. You must make your own determination on the credibility of their remarks.

It is worth a phone call to your state's attorney general's office to determine if any complaints have been received, actions pending or litigation initiated against the franchise that you are considering. Some attorney general offices will informally let you know if there has been action against the company. Others, however, are far less forthcoming and more bureaucratic in their approach to providing information. The Better Business Bureau, which is not a government body, may offer you some very limited information.

As important as investigating the franchise is, it is still less important than choosing the franchise that is best suited to the potential franchisee. The self-evaluation process must supersede the evaluation of the franchise itself. Once you have selected the franchise best suited to your personality, needs and goals, then you can evaluate the franchisor.