Head of the Class
Lesson 3: Information, Please
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A big part of the challenge of looking into a franchise is
getting your hands on information. I've got some good news: The
franchisor is required to package the key investment information
and hand it to you in a document called a Uniform Franchise
Offering Circular (UFOC). It spoon-feeds you some basic information
about the franchise investment. The first thing to understand about the UFOC is that it's
actually three documents sandwiched together: 1) a 23-item
narrative about the franchise offer, 2) up to three years of
audited financial statements of the franchisor, and 3) the form of
franchise agreement you'll be asked to sign. If you're
serious about a particular program, you should carefully read this
document. It's amazing how many franchise investors don't
bother. It's required by law to be written in plain English, so
don't be intimidated. I can tell you that every student
who's completed this class has read the UFOC and understands
its limitations and strengths. First, look at the UFOC's attachments. You may have no
experience reading a commercial contract or a set of financials,
but these will be indispensable to your professional advisors. Take
the contract to a good business attorney; let your counselor look
through it and explain it to you. If you and your attorney conclude
there are points you can't live with, explore negotiating with
the franchisor. Content Continues Below
Take the financial statements to an accountant trained to
evaluate all those numbers. Your basic questions: Does the
franchisor have the financial wherewithal to meet its commitments
under the franchise agreement? And will it be around for a while?
Your accountant can also use Item 7 information to advise you on
your own financial planning for the investment. Do Your Homework - Visit current franchisees. Ask what they like and
dislike about the business, how much they made last year, and if
they would make the investment again.
- Hire a good attorney and accountant. This may seem like
an extravagance, but it's money well spent. An attorney will
explain the franchise agreement and discuss what provisions you may
want to negotiate with the franchisor; and an accountant will give
you an idea of the franchisor's financial standing and do
financial planning for your business.
- Visit the franchisor's headquarters. You'll
learn a lot about the company just by seeing the operation and
meeting the team.
- Check with the Better Business Bureau. Go to www.bbb.org, or locate
offices in the phone book. Find out if there are any complaints
filed against the franchisor.
- Contact your state attorney general's office. This
is the office most likely to regulate franchising if it's
regulated in your state. The states that regulate it are:
California, Hawaii, Illinois, Indiana, Maryland, Michigan,
Minnesota, New York, North Dakota, Rhode Island, South Dakota,
Virginia, Washington and Wisconsin.
Originally published in the September 2004 issue of Entrepreneur's StartUps
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