Research A Franchise

Evaluate The Opportunities

A prospective franchisee has a distinct advantage at this stage of the search: The law hath delivered unto you a FDD. The FDD is an extensive prospectus-like document describing the ins and outs of individual franchises; the law requires franchisors to deliver their FDDs to each prospective franchisee during an in-person meeting or at least 10 business days before you sign a contract or pay money to the franchisor.

Reading the FDD is an essential step in your evaluation. It'll open your eyes to the basic information you need to know when considering the franchise. If you treat it like an imposing insurance policy and slide it directly into your someday-I'll-get-to-it pile, you're doing yourself a big disservice.

One piece of good news about the FDD is it's not as intimidating as it looks and is even required to be written in plain English. The FDD is a sandwich document made up of three principal parts: a narrative description, financial information and contracts. The first part is a 23-section narrative describing all aspects of the franchise being offered. You'll learn about the fees charged for the franchise, the franchisee's total investment, the legal status of the trademarks, any product restrictions, financing offered by the franchisor, the franchisor's obligations under the franchise agreement, system performance information and statistics about the network of franchisees.

The second part of the FDD is comprised of three years' worth of the franchisor's audited financial statements. This tells you in no uncertain terms about the company's financial standing. After all, if you're prepared to enter into a 10- or 20-year relationship with a franchisor, you'd better know whether it has the money to survive the long haul. If the company's net worth is minimal, at least you can gauge the risk of investing accordingly.

If you don't yet have your MBA or a CPA license, you may want to take the financials to a good accountant or other business advisor. You'll probably need the services of an accountant anyway to prepare your own business plan once you select the right franchise.

The third part of the FDD is the standard form of the franchise contract. A business-format franchise agreement tends to be a lengthy, complex legal document. It has a lot of moving parts and can be difficult to understand . . . no plain English to be found here, my friend. This single document legally manages a long-term commercial relationship; it incorporates the operating manual standards and licenses the intellectual property to be used in the franchise. It also addresses the assignment rights of the franchisee, and spells out what happens if the relationship is terminated. Lawyers for the franchisor prepare the standard franchise agreement with their client's interests firmly in mind. The typical franchise agreement is on the order of complexity of a commercial lease, and you shouldn't sign it without the aid of a competent attorney looking out for your interests.

Hire a good lawyer to review the FDD for you. Yes, it'll cost a few dollars, but it's insurance money well spent. You don't want surprises in your relationship with the franchisor. Your attorney can explain the obligations imposed on the franchisee, what formal promises the franchisor makes to you and whether any aspects of the contract may strongly conflict with your interests.

Can you negotiate on the terms of the franchise agreement? Any part of the agreement can be changed if the franchisor agrees to it, but companies are oftentimes reluctant to make negotiated changes in certain states. In California, for instance, a negotiated change in one franchise agreement creates significant additional bureaucratic hoops that the franchisor must jump through. The franchisor must also disclose the change to future franchisees--not an attractive prospect for a franchisor inclined to cut a series of special deals for franchisees. California's FDDs inform franchisees of all such negotiated changes and thus level the information playing field.

Tackling the largest tasks means breaking them down into more manageable pieces. Even the prospect of buying a franchise becomes far less scary if you just take it a step at a time.

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