Franchise Buying Guide

Finding the Perfect Opportunity

Gaining Prospectus
Presented by Guidant Financial
Guidant Financial specializes in helping entrepreneurs purchase new franchises using their retirement funds.

Gaining Prospectus
If you gather a handful of UFOCs from different franchises, they'll seem very much alike, all following the same outline. It's a sandwich of three sections: 1) a 23-item narrative describing the franchise, the franchisor's back-ground and details of the investment; 2) a copy of contracts; and 3) the franchisor's audited financial information.

The UFOC must be written in plain English and be well-organized, so it's fairly easy to read. Here are some of the more important items to review.

Items 3 and 4:Litigation and Bankruptcy. You'll find details here if the franchisor or individuals listed among the company's managers have been sued in the past 10 years in material litigation, or if the company or its officers have been through a bankruptcy.

Items 5, 6 and 7:Fees and Total Estimated Investment. These items describe in detail the fees required by the franchisor, and the estimated total investment for opening a franchise. Show the total investment estimate to your accountant; it's an invaluable tool for financial planning.

Item 8:Restrictions on Sources of Products and Services. This describes your obligations as a franchisee when buying inventory, supplies and operating equipment, and is important in your everyday opera-ton of the franchise.

Item 11:Franchisor's Obligations. This item summarizes the franchisor's obligations to a franchisee both before you open for business and during operation. It also notes the requirements relating to business computers, locations and training programs.

Item 12:Territory. Most franchises--at least those with retail locations--grant articulated territorial rights in a specific geographic area; this item lays out those rights.

Item 17:Renewal, Termination and Transfer. The basic rules are summa-razed in a chart form; these provisions and the corresponding sections of the franchise agreement will be of particular interest to your lawyer.

Item 19:Financial Performance Information ("Earnings Claims"). In about 70 percent of UFOCs, this section conveys no information about performance. Under disclosure rules, the franchisor has the option to present earnings claims; if it makes earnings claims, they must be disclosed here.

Item 20:List of Franchisees. Here you'll find several charts showing the growth (or shrinkage) of the entire franchise system over the past three years, the growth and projections regarding company-owned locations, and projected franchise sales categorized by state. The most valuable portions of Item 20 for your research, however, are the lists of existing franchisees as well as those who left the system in the past fiscal year, plus contact information. This is your best tool for essential field research. Franchisees will tell you the unvarnished truth and give you a feel for day-to-day operations. Call for an appointment, then go and sit in the location while you ask about the owner's experience. Has the business done well in this location? Was the training valuable? Has the franchisor been supportive? What is the net on gross sales? Knowing what they know now, would they make the investment again?

The UFOC also contains an exhibit of as many as three years of the franchisor's audited financial statements. This information reveals a lot about the franchisor's stability--whether it has the financial roots necessary to remain in business and support the continuing needs of its franchisees. If you don't have experience reading financial statements, hire an accountant. If the franchisor is on the verge of insolvency, you need to know; if it's well-capitalized and shows financial signs of healthy growth, you need to know that, too.

Finally, the disclosure document contains a copy of all the standard franchise agreements and related con-tracts you'll sign as a franchisee. These are typically lengthy documents jampacked with legalese. Before you sign a franchise agreement, have an experienced attorney review it. He or she can go over what obligations will be imposed on you, and whether your rights are clearly stated.

Can you negotiate the terms of a franchise agreement, or do you have to sign the standard form? It depends on the franchisor. In general, newly established franchisors are more likely to negotiate. Why? Often, a newer franchisor is more anxious to make the franchise sale and perhaps more willing to yield to requests for franchisee-favorable changes.

Use your franchise street smarts to navigate down franchising's well-worn path to success, and you'll find a structured and systematic approach to making your first million.

All You Need to Know
Here's where you can find the best information on franchise investing.

The FTC's website (www.ftc.gov).

Entrepreneur.com (www.entrepreneur.com). Collected articles, industry analysis and a listing of the top 500 franchisors in various categories.

International Franchise Association (www.franchise.org).

SBA Registry (www.franchiseregistry.com). When you're applying for an SBA-backed loan at a participating bank, the review process is shorter if your franchisor is on the Registry.

FranSurvey (www.fransurvey.com). This internet company surveys all existing franchisees in a system, summarizes the responses and publishes these summaries.

Better Business Bureau (www.bbb.org). The BBB publishes "Reliability Reports" on businesses, including some franchise companies.

Franchises & Business Opportunities: How to Find, Buy and Operate a Successful Business (www.amazon.com).

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This article was originally published in the October 2006 print edition of Entrepreneur's StartUps with the headline: Perfect Match.

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