Cheap Sheet

Do Your Homework

Start with the quality of your search. Attending a franchise trade show is a great way to get your feet wet. Held in large cities nationwide, these shows allow you to meet dozens of franchise representatives, all eager to convince you that their programs are tailor-made for you.

Go with an open mind, but before you go, spend a few minutes writing down what would best meet your financial expectations and investment level. Know how much you have to spend on a franchise business and what type of business would excite your interests. Are you good at selling and do you want to deal with the public? Or do you see yourself involved with other businesses? Getting your thoughts straight before you arrive on the trade show floor will save you time and aggravation. If you're looking for a lower-level investment, you don't want to spend your valuable time talking to restaurant franchisors about $500,000 investments. Also, jot down a few qualifying questions so they're at the top of your mind when you approach a booth: "Can you tell me the total investment range for your program?" "What are your initial fees?" "Are there other franchisees in my town?" "How long have you been in this business?"

You should come back from a franchise trade show with basic information about a sampling of qualified programs. Follow up by writing a letter or e-mail requesting more information from the ones that interest you.

The internet provides a flood of information about franchising, and you should put it to work for you. The ratio of hype to fact is rather high, but there is no better way to shop for ideas and to get a sense of the programs available in the market. New, sophisticated tools that will help you search are showing up on the net. For instance, for a modest price, www.fransurvey.com provides a collected survey of franchisee opinions about their own experiences in a growing number of franchise systems.

Federal and state enforcement agencies are also helpful research sources. The FTC regulates franchise sales nationally and has a useful website that gives you a sense of the actions recently taken against franchisors that have not been playing by the rules.

If you live in one of the 14 states that also regulates franchise sales, you should check with the regulating agency to make sure a franchisor is registered in your state to actually offer and sell you a franchise. The registration states are: California, Hawaii, Illinois, Indiana, Maryland, Michigan, Minnesota, New York, North Dakota, Rhode Island, South Dakota, Virginia, Washington and Wisconsin. Contact the state attorney general or securities commissioner, and inquire about franchise registration information. If you are not in one of these states, contact your state consumer protection officials about franchise investments-you might be able to learn whether there are any current problems with a particular franchisor. The Better Business Bureau is also a reliable source of documented complaints lodged against franchise businesses.

The two prime areas of research on your list are the franchisor itself and existing franchisees in the system. Franchisors are required by law to provide an invaluable document to prospective franchisees, and you should look for a copy from a franchisor if you are serious about its offering. This document, called the Uniform Franchise Offering Circular (UFOC), must be delivered to a prospective franchisee at least 10 business days before a contract is signed or money is paid, or at the first personal meeting to discuss the sale of the franchise, whichever comes first. That means the company is not required to deliver a document to everyone who applies, just to those who have a face-to-face meeting or actually commit to buying a franchise. The franchisor may choose to give you a copy at any time, so by all means request one.

The UFOC serves essential information to you on a platter; it's research in its simplest form. You can read all about the company, summaries of the fees to be paid to the franchisor and your total investment (see Item 7), required purchases, territory and trademark rights, earnings claims, and system statistics. Attached as exhibits are lists of current franchisees and recently departed franchisees, the form of franchise agreement you will be asked to sign, and up to three years of the franchisor's audited financial statements. Be sure to read this vital document before you put your money on the line. Take the financials to a qualified accountant and the franchise agreement to an attorney for evaluation, and you'll have the right experts on your side.

Your final stop on your research quest is to talk to franchisees and interview as many existing franchisees as you can.

Like this article? Get this issue right now on iPad, Nook or Kindle Fire.

This article was originally published in the February 2005 print edition of Entrepreneur's StartUps with the headline: Cheap Sheet.

Loading the player ...

Seth Godin on Failing Until You Succeed

Ads by Google

Share Your Thoughts

Connect with Entrepreneur

Most Shared Stories