Check It Out

On The Lookout

While investigating a franchise, keep in mind these indications that the franchise may be right for you:

  • You have investigated the type of business and find you have a sustained, compelling interest in it. You take a temporary position in the same type of company and love it.
  • When you interview existing owners, they tell you that the help of the franchisor has been instrumental to their success.
  • You get mixed reports from franchise owners because they all have different reactions, experiences and feelings about their franchise ownership. (Worry if you get the same rosy story from everyone.)
  • The franchisor is on solid financial footing, and the Item 20 statistics in the UFOC show ownership stability.
  • You find there is a low level of competition in your market area but that you will not be the first one in the market with this business. Being a pioneer presents a relatively high risk.
  • Your accountant tells you that the projections indicate you will be able to afford the purchase and have sufficient capital to weather the start-up phase of the business.

Here are some indications that the franchise may not be right for you:

  • You find that the franchisor has a lengthy history of suing franchisees, Item 20 indicates a high level of franchisee turnover, and existing owners tell you there is trouble in the system.
  • The trademark is not federally registered because the franchisor filed with its home state and thinks that is sufficient.
  • The franchise fees, especially the monthly royalty, are too high for you to make money at the business. Also, your accountant's projections do not paint a pretty picture.
  • The franchisor's financial statements show a minimal net worth, and other financial indications suggest it is on a downward slide.
  • Item 19 (Earnings Claims) of the UFOC is blank, and franchisees tell you it's because no one has figured out how to make money at this business yet.
  • The franchise concept is largely untried in the marketplace, and you can't afford to put your life savings at serious risk.

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This article was originally published in the January 1998 print edition of Entrepreneur with the headline: Check It Out.

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