The question prospective franchisees ask me most frequently is, "How can I find out if the franchisor is legitimate?" Some people imagine there's some sort of national clearinghouse that can confirm legitimacy on the telephone. There is no such place, but there are clues ripe for the picking. Here are five likely sources of information to help you answer that all-important question.
1. Even though it may not tell a complete story, the UFOC will tell you volumes about the franchisor and its background. What sort of business experience do the company's key executives have (Item 2)? What does it say about the company's history of litigation (Item 3) and bankruptcy (Item 4)? Is the trademark registered with the federal Patent and Trademark Office (Item 13)? What do the system numbers (Item 20) say about the number of franchises that have opened for business in the past three years?
2. Another great source of information: existing and former franchisees. Call them (they're listed in Item 20 of the UFOC), and set up interviews. Ask them about their experiences with the franchise, the training, the investment and how their business is performing. And ask the ultimate litmus-test question: Would you make the same investment knowing what you know now? If the franchise offering is new and there are no existing franchisees to call, you have no comparable source of information.
3. State agencies can be most useful in your evaluation, particularly if you're in a state that regulates franchise sales. The franchise registration states are California, Hawaii, Illinois, Indiana, Maryland, Michigan, Minnesota, New York, North Dakota, Rhode Island, South Dakota, Virginia, Washington and Wisconsin. Each of these states requires a franchisor to register to offer franchises. Find out if the franchise you're interested in is registered before getting too serious.
4. The Better Business Bureau provides reports of customer complaints received. For more information, go to www.bbb.org.
5. The FTC brings legal enforcement actions, large and small, against franchising companies. Look over its recent activity at www.ftc.gov.
Franchise Fitness Checklist
Muscled up and fit to buy:
- The franchisor is financially strong; your accountant is satisfied.
- Franchisees in the system give their investment decision the thumbs up. Some systems make their franchisee "grades" available online for a modest price (see www.fransurvey.com).
- The business offers a good fit with your interests, and you're excited to jump into the business. Even better, you have experience in this type of business.
- The revenue potential looks strong.
- Market trends are in favor of this business.
- A good location or good customer base is available in your home market.
- The franchise system shows steady growth.
Still flabby and needs to step up its regimen:
- There is a load of litigation reported in the UFOC, revealing a rough franchisor dispute-resolution style.
- Franchisees in the system say they feel trapped and would not make the same investment again.
- Franchisees in the system say the training is inadequate.
- Your lawyer says the contract is heavy-handed and poorly prepared, and your accountant wonders whether the franchisor will be around in 12 months.
- Your state franchise or consumer-protection agency says the franchisor is not registered (if required) or that numerous complaints are on file.
- The franchisor provides you no UFOC, or the UFOC they give you is out of date, incomplete or not registered (if required).
Andrew A. Caffey is a practicing franchisor attorney in the Washington, DC, area and an internationally recognized specialist in franchise and business opportunity law.