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Presidential Secrets

Investigate the Franchise

"I am not a crook." -Richard Nixon.
Confirming the legitimacy of a franchisor can be difficult. More often than not it's a matter of evaluating the franchisor's experience or lack thereof in the business. The less time the franchisor has been in the business being franchised, and the fewer the number of franchisees in the system, the higher the risks posed to the investor.

Investigating the legitimacy at the government level is relatively easy. Contact any one of the attorneys general in the franchise registration states and ask whether the company is currently registered and about any cases or investigations they can tell you about. The franchisor will also be on file as registered or exempt under the state's business opportunity law in the states of Kentucky, Florida, Nebraska, Utah and Texas.

Check with the Better Business Bureau in your state and find out whether a significant number of complaints have been filed against the company. If that is the ase, follow up with other franchisees or the franchisor.

If you're in a non-registration state, your state's attorney general or consumer protection Office may also be able to give you information about any problems experienced with the company. The Federal Trade Commission, the federal agency that regulates franchise sales nationally, will be of less help on a specific inquiry but is a great source of general information about franchise investments. Contact the FTC on the Internet at www.ftc.gov, where you'll find a bonanza of information about recent enforcement actions and booklets on how to purchase a franchise. Call its Consumer Response Center in Washington, DC (202-326-3128), and you'll be invited to volunteer information that the Commission might use to discern patterns in the marketplace or identify companies causing widespread consumer injury or complaint. According to the recording offered by Consumer Response Center, the FTC cannot respond individually to complaints submitted.

"Trust, but verify." -Ronald Reagan.
By far the best way to confirm the legitimacy, experience and expertise of a franchisor is to interview current franchisees in the system. Check the list contained in Item 20 of the UFOC and call a number of those closest to your market. Jump in the car and visit them. Sit in a unit for an afternoon watching the business operate. Ask the owners about their experience with the franchisor. Was the training helpful and complete? What do they wish they had known going into the business? Do they make enough money at the business to meet their expectations? How much did the business gross last year? Is this year looking stronger or weaker? Why? Ask franchise owners whether there's a strong and active franchisee association, and if the franchisor pays attention to the views of franchisees. Finally, ask them if they would do it again knowing what they know now about the business. Be sure to meet several franchisees so you hear a fair sampling of views. Take careful note of responses made to your questions, and follow up with the franchisor to discuss comments that concern you.

The final word on researching and finding a great franchise is from one of our greatest presidents, Roosevelt: "Far and away the best prize that life offers is the chance to work hard at work worth doing."


Andrew A. Caffey is a practicing franchise attorney in the Washington, DC, area; an internationally recognized specialist in franchise and business opportunity law; and former general counsel of the International Franchise Association. E-mail him at ACaffey@compuserve.com.

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This article was originally published in the January 2001 print edition of Entrepreneur with the headline: Presidential Secrets.

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