Would You Like a Franchise With That?

Take a Second Look

Take a Second Look

When you've reached the point where you're seriously investigating one franchise, Luther suggests spending two to three days in a store to get a feel for what it will be like to run one. If a franchisor balks at the idea, be suspicious, says Luther. Meet with the franchisor's leadership team by visiting its headquarters. Note the energy of the people and their feelings toward the brand. "Are people smiling and excited?" asks Luther.

And be sure to pay a visit to the company's legal department. Find out how many lawsuits it's involved in, and find out why. If the company is focused on evaluating and improving standards, says Luther, "franchisees should look at that as a good thing" because it shows the franchisor's commitment to upholding its concept. Ultimately, the deeper you go in examining your choices and evaluating franchisors with an objective eye, the greater your chances are of entering into a business marriage that's for better, not worse.

For more information on how to buy a franchise, visit our FranchiseZone


Before you put your franchise plans into high gear, learn what to watch out for.

Red Light/Green Light is not just a kids' game-it's a universally understood signal system meaning stop/go. Investigating a franchise promises excitement and opportunity, but if you don't pay attention to the signals, you're just playing in traffic.

Red Light: You make an impulse decision based on an exciting franchise sales presentation.

Green Light: You focus on your interests, read a lot, research the opportunities presented to you and ask questions. Realize that selecting and evaluating a franchise is a double decision: You're selecting a business that will engage your energies for a long time to come, and you're choosing a partner in the franchisor. This is too important to allow yourself to be sold; you want to pursue a franchise opportunity because it meets your predetermined needs and desires.

Red Light: You dash through the internet to see what strikes your fancy, believing the hype.

Green Light: You use the internet to browse and collect information, but as you narrow the search, you contact each company and gather information directly. There's a rather high hype-to-fact ratio on the net, especially on franchise promotion sites.

Red Light: You toss the Uniform Franchise Offering Circular (UFOC) into your file or, worse, in the trash, and never crack it open, figuring "Who needs all that legalese?"

Green Light: You understand what's in the UFOC and wouldn't dare toss it aside. This remarkable document gives you a decided advantage compared to other types of investments. The UFOC actually spells out in plain English (there is no legalese allowed, except in the contracts) all the "material" (read: important to you) information about the franchise, the franchisor, the franchise system and the financial dynamics of the investment.

There are three main components of a UFOC: a 23-item narrative description, including contact information on current franchisees and those who left the system in the past year; audited financial information about the franchisor; and the forms of contracts you'll be asked to sign.

The narrative description of the offering is most helpful. It reviews, in summary form, the franchisor's background (business, litigation and bankruptcy); the fees you'll pay the franchisor; estimates of your total investment in the franchise; your inventory and other purchasing requirements; financing provided by the franchisor; the contractual service obligations of the franchisor; trademarks/copyrights/patents; renewal/transfer/termination provisions; earnings claims information; and statistical summaries of the entire franchise system.

Red Light: You do a full review of the UFOC all by yourself.

Green Light: You have the audited financials prepared by an independent CPA. Once you get independent insight into the financial health of the franchisor, you can judge whether the company is rock-solid or financially wobbly. If you're uncomfortable reading those numbers, by all means hire an accountant or business advisor who can interpret them for you. The same "green light" applies to hiring legal assistance with the franchise agreement. This is not the place to pinch the nickel until the eagle screams. Think of it as investment insurance-professional advice on your franchise is money well-spent.

Red Light: You don't want to impose on current franchise owners-they must be so busy.

Green Light: You are eager to talk to as many current franchisees as you can. This is your best source of candid views on the investment opportunity. Make an appointment and visit. A current franchisee can give you the clearest signal of all.

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This article was originally published in the January 2005 print edition of Entrepreneur with the headline: Would You Like a Franchise With That?.

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