Many prospects don't ask franchisors enough questions before deciding on a particular franchise, Dupries says. For instance, they may go through Discovery Day without asking to see the training or operations manuals that they're allowed to view at that point. Real estate is another important component that prospects frequently overlook. Dupries says many expect help from the franchisor in finding a location, but they don't always get it. Prospects should find out the average time it takes franchisees to find a location and how many franchisees are still looking six months or more after signing up. If necessary, scan announcements of sign-ups, then compare those figures with the current and previous years' store counts to get an estimate of how many are still searching for a storefront.
"Finding retail real estate is really tough in many [areas of] the country," Dupries says. "I had one fellow buy a franchise from me to operate while he waited to find a location for his sub sandwich concept. It had already been a year. Meanwhile, [his] living expenses were burning up cash."
Risk vs. Return
Worries about real estate and other overhead costs were factors in Armando DeMolina's decision to buy homebased franchise i9 Sports, which operates sports leagues for kids. He was excited about i9 but afraid of making an emotion-based decision, so he asked his wife, Margie, 37, and in-laws to research the company and play devil's advocates. But they gave i9 a thumbs up.
DeMolina focused his research on established i9 franchisees in his region of Broward County, Florida, asking them about costs, marketing plans, ramp-up time and more. After conversations with three local franchisees and a Saturday trip to watch a franchisee's league play, DeMolina, 40, had a solid picture of his expected role, as well as first-year revenue and profits. He also identified his biggest concern with the i9 model: that he would not be able to find available sports fields to hold his games. Franchisees helped him with strategies for overcoming that hurdle, and he was able to locate an underused local park to host his events. DeMolina opened in April last year and started his first season in September with a flag-football league. He signed up a capacity crowd of 186 kids--at $145 a head.
In-depth research pays off in situations like DeMolina's, says Siebert, because it helps identify possible risks and potential rewards. "Franchisees need to understand the concept of risk vs. return," Siebert says. "What you'll make is half of the equation. Measure your potential risk, not just potential reward, to understand if that risk is worth it." For more information on researching a franchise, visit entrepreneur.com/franchises.
A UFOC Makeover
Since 1979, the Uniform Franchise Offering Circular, or UFOC, has offered details about franchise operations to prospective franchisees. Before the UFOC was required, the franchising world was a playground for criminals who perpetrated numerous scams, ripping off prospective franchisees for millions, says franchise attorney David Kaufmann.
Since the UFOC's appearance, the industry has been virtually scandal-free, he notes, a sign that the UFOC is doing its job. "Now franchising is among the cleanest marketplaces in the U.S.," he says, "with franchisees who are among the most informed investors in the world."
If the UFOC has done a good job of keeping franchisors honest up to now, the situation should only improve this year when the document takes on a new set of regulations and a new name: Franchise Disclosure Document. Starting this July, the FTC will require franchisors to comply with the new disclosure law, which should make it easier for prospective franchisees to learn about franchisors. Among the highlights:
- The new law encourages more disclosure about earnings. Information about business costs can be freely disclosed, and financial results can be given in the FDD for a subset of franchisees without having to compare them to the entire chain.
- The FDD and other informational documents may be sent electronically--a change franchise attorney Andrew Caffey says will save franchisors money and encourage them to send information to prospects sooner.
- Franchisors must disclose contact information for all franchisee associations in their system, including ones approved by the franchisor as well as independent associations. Before, prospects had to find these on their own.
- If a franchisor's corporate parent guarantees the business or provides supplies to franchisees, its contact and financial information must be disclosed. Previously, corporate parents could go unmentioned.
- More lawsuit disclosure is now required. Franchisors must list suits they've filed against franchisees over the previous year, not just vice versa.
One caveat to the new rule: Franchisors don't have to make any disclosures to high net worth investors or those making a large-value investment in a franchise. The thinking is that these investors should have the resources to uncover the facts they want to know on their own.
Even with the improvements, prospective franchisees should be aware that the FTC doesn't check the information listed in franchisors' UFOCs. Within the bounds of the law, franchisors can and will paint the rosiest financial picture they can in their disclosures, says Mark Siebert, CEO of consulting firm iFranchise Group. Ultimately, it's still up to prospects to check out franchisor's claims. Says Siebert, "Any research materials the franchisor gives you should be taken with a grain of salt."
State of Affairs
Fourteen states (California, Hawaii, Illinois, Indiana, Maryland, Michigan, Minnesota, New York, North Dakota, Rhode Island, South Dakota, Virginia, Washington and Wisconsin) require franchisors to file or register with state officials before any offering activity can take place.
If you're in one of these states, it means franchisors have gone through the process of document review by state examiners and achieved registration, clearing an important hurdle in the life of the franchisor. Registration is no guarantee, of course. It simply means the company has taken an important step to comply with the law. It has filed its offering on the public record in that state and will remain under the annual scrutiny of state officials.
If you live in a registration state, you should call the appropriate agency to confirm that the company is currently registered to offer and sell franchises. --Andrew A. Caffey