What To Consider Before Buying A Franchise
By John Mussi, Thu Dec 8th
Here are some useful tips on what to consider before buying afranchise. Before investing in any franchise system, be sure toget a copy of the franchisor's disclosure document. Sometimesthis document is called a Franchise Offering Circular. Youshould read the entire disclosure document.
The following outline will help you to understand key provisionsof typical disclosure documents. Get a clarification or answerto your concerns before you invest.
Business Background: The disclosure document identifies theexecutives of the franchise system and describes their priorexperience. Consider not only their general business background,but their experience in managing a franchise system. Alsoconsider how long they have been with the company. Investingwith an inexperienced franchisor may be riskier than investingwith an experienced one.
Litigation History: The disclosure document helps you assess thebackground of the franchisor and its executives by requiring thedisclosure of prior litigation. The disclosure document tellsyou if the franchisor, or any of its executive officers, hasbeen convicted of crimes involving, for example, fraud.
Bankruptcy: The disclosure document tells you if the franchisoror any of its executives have recently been involved in abankruptcy. This will help you to assess the franchisor'sfinancial stability.
Costs: The disclosure document tells you the costs involved tostart one of the company's franchises. It will describe anyinitial deposit or franchise fee, which may be non-refundable,and costs for initial inventory, signs, equipment, leases, orrentals.
Restrictions: Your franchisor may restrict how you operate youroutlet. The disclosure document tells you if the franchisorlimits the supplier of goods from whom you may purchase, thegoods or services you may offer for sale, the customers to whomyou can offer goods or services or the territory in which youcan sell goods or services.
Terminations: The disclosure document tells you the conditionsunder which the franchisor may terminate your franchise and yourobligations to the franchisor after termination. It also tellsyou the conditions under which you can renew, sell, or assignyour franchise to other parties.
Training: The disclosure document will explain the franchisor'straining and assistance program. Make sure you understand thelevel of training offered.
Advertising: You often must contribute a percentage of yourincome to an advertising fund even if you disagree with howthese funds are used. The disclosure document providesinformation on advertising costs.
Current and Former Franchisees: The disclosure document providesimportant information about current and former franchisees.Determine how many franchises are currently operating. A largenumber of franchisees in your area may mean increasedcompetition. Pay attention to the number of terminatedfranchisees. A large number of terminated, cancelled, ornon-renewed franchises may indicate problems.
Earnings Potential: You may want to know how much money you canmake if you invest in a particular franchise system. Be carefulas earnings projections can be misleading. Insist upon writtensubstantiation for any earnings projections or suggestions aboutyour potential income or sales.
Financial History: The disclosure document provides you withimportant information about the company's financial status,including audited financial statements. Be aware that investingin a financially unstable franchisor is a significant risk; thecompany may go out of business or into bankruptcy after you haveinvested your money.
Hire a lawyer or an accountant to review the franchisor'sfinancial statements. Do not attempt to extract this importantinformation from the disclosure document unless you haveconsiderable background in these matters. Your lawyer oraccountant can help you understand the information.
You may freely reprint this article provided the author'sbiography remains intact:
About the author:John Mussi is the founder of Direct Online Loans who help UKhomeowners find the best available loans via the www.directonlineloans.co.uk website.
