Starting any business has risks, and those risks aren't entirely offset by the advantages of the franchise or business opportunity relationship. How can you be sure the company you buy an opportunity from is on the level?
If you're considering a franchise, you have an advantage: all franchisors must provide a comprehensive disclosure document that reveals key information about the investment and the seller. Called a Uniform Franchise Offering Circular (UFOC), this document must be delivered to you at either the first meeting to discuss the opportunity or 10 business days before you sign a contract or pay a fee-whichever is earlier.
The UFOC is required reading if you're considering a franchise. It consists of a detailed description of the franchise offering, the seller's audited financial statements for the past three fiscal years, and a copy of the franchise agreement and any related contracts. Review these documents with an accountant to see if the company is on solid financial footing.
The business backgrounds of the people running the franchise, and the litigation and bankruptcy histories of the company and its management, are also detailed in the UFOC.
Item 20 of the UFOC shows the growth or decline of the franchise system over the past three years, and lists active franchisees and those who have left the system in the past year.
Franchise fees and a detailed estimate of the total investment are also included, and you'll receive a breakdown of any financing the franchisor offers, as well as information on advertising and training.
Visit several franchisees in your area. (The UFOC provides a list of them.) Ask them what they like and dislike about the franchise and whether they'd buy it again knowing what they know now.