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All That Glitters

It's easy to be blinded by all the tempting opportunities out there. Keep these points in mind while doing your research, and you'll be sure to strike franchise gold.

This story appears in the February 2004 issue of Start Up.

Buying a franchise is a complicated investment-don't letanyone tell you it isn't. If you are new to the idea of gettinginvolved in a franchised business, take your time, and have a goodlook around. No doubt you'll find some sparkling opportunities.But there are also some sinkhole investments you'll want toavoid. The trick, of course, is to tell them apart. As with mostinvestments, there's no way to separate the gold from thefool's gold without careful investigation. Make sure it'sfor real, and reduce the risks of the investment as much aspossible.

Here are the seven essential things you should know about goinginto a franchise program:

1. State and federallaws provide some regulation of franchise sales and provideyou, the investor, some protection against fraudulentfranchise offerings. A franchisor anywhere in the UnitedStates must deliver a complete disclosure document known as aUniform Franchise Offering Circular (UFOC), so you can make aninformed investment decision. You must receive this imposingdocument at least a couple of weeks before you sign a bindingcontract or pay money to the franchisor. Fourteen states(California, Hawaii, Illinois, Indiana, Maryland, Michigan,Minnesota, New York, North Dakota, Rhode Island, South Dakota,Virginia, Washington and Wisconsin) require the franchisor to alsoregister its offering papers before selling in the state.

2. The UFOC is atreasure trove of investment information, so read itcarefully. Good news: It's written in plain English.This document really does give you a leg up in the investmentevaluation. A UFOC is made up of 23 items of narrative discussionabout the program (everything from the business background of keyexecutives to trademark information to lists of current anddeparted franchisees), up to three years of the franchisor'saudited financial statements, plus a copy of the form of franchiseagreement you will sign.

3. The UFOC is onlythe start of your investigation. Do not make the mistake ofthinking the disclosure document contains everything you need toknow about the investment. It doesn't. You must talk to some ofthe current franchise owners. Ask them about their experiences,their opinions of the franchisor, and the work involved in thefranchise. You can also ask them about the money they've madein the franchised business. If you live in one of the 14 franchiseregistration states already mentioned, you can check with theattorney general's office in your state to confirm that thecompany is properly registered. Go to the Better BusinessBureau's Website to check on the company's complaint record.

4. You need advisorsto help you review the franchise agreement and the financialinformation in the UFOC. Don't be cheap when it comes tohiring a good attorney and accountant. You're going to needtheir help.

5. Spend some timeon the Internet, particularly at the FTC's Website and those of other franchise organizations. Readthe warnings the government provides, and get a sense of theenforcement steps the FTC has taken to keep the franchisemarketplace in balance. Watch out for hype among the franchisesales organizations on the Net.

6. If an investmentpackage is not a true "franchise," it may be regulated asa "business opportunity." Generally, if there isno trademark licensed to the buyer and no continuing assistanceprovided, the investment is not a franchise, but it's adifficult line to define. Find out from the seller or your attorneyhow the program is regulated and whether it is in compliance beforeyou hand anyone your credit card.

7. Know the warningsigns of a risky franchise investment. These include noUFOC, very weak franchisor financial statements, too many lawsuits,no federally registered trademark, no real answers to yourquestions, and consistently bad reviews from current franchisees.There may be other problems as well. Keep your head up and yourhand over your wallet until you find that great franchiseinvestment.

For more on buying a franchise, check out our Franchise Zone. Keep digging. It's outthere.

Andrew A. Caffeyis a practicing franchise attorney in the Washington, DC, area; aninternationally recognized specialist in franchise and businessopportunity law; and former general counsel of the InternationalFranchise Association.

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