Evaluating franchise opportunities

Having a short list of industries to investigate lets you start looking at specific franchises. Potential franchisors should send you detailed information at no cost - simply call companies you are interested in and request the information. You can get many more leads at franchise trade shows, which bring together hundreds or thousands of franchisors looking for buyers. You can also talk with a franchise consultant or broker.

When evaluating specific franchise opportunities, you will have a huge amount of information to absorb, largely because of the Uniform Franchise Offering Circular (UFOC).

When evaluating specific franchise opportunities, you will have a huge amount of information to absorb, largely because of the Uniform Franchise Offering Circular (UFOC). The UFOC is a comprehensive, detailed report that the Federal Trade Commission (FTC) requires every franchisor to supply to potential franchisees. The rules have recently been updated, and now specify that potential buyers must receive the UFOC at least 14 days before signing any contracts.

The UFOC includes detailed descriptions and terms of the franchise program, financial and legal information about the parent company, and sample franchise contracts. The UFOC is a goldmine of information that can help you pick the right company to do business with - and too many aspiring franchisees fail to use it to its full potential. You should plan to spend a significant amount of time studying this information.

For example, the financial health of the parent company is critical to their ability to support you - and also gives an indication of the current demand for their products and services. Look at revenue trends, profits, and the number of locations opened and closed recently. Rapid growth can actually be a problem. If the company is opening franchises at a high rate due to overwhelming demand, they may quickly run out of the resources needed to provide the training and support you need to succeed.

Franchisors are also required to disclose past litigation against the company and its executives. These days, any big company is a target for lawsuits, so the existence of lawsuits is not necessarily cause for alarm. However, one big red flag to look for is any lawsuits filed by their own franchisees. This can indicate a company that may not deal honestly or fairly with its franchisees. Also look for any suits against executives for fraud or deceptive business practices. Make sure to inquire about any lawsuits that concern you.

The UFOC includes information on current franchises in your area, as well as former franchisees who have left within the past year. You should absolutely contact both current and former franchisees and ask them about their experiences:

• Did they get the support they needed from the parent corporation?
• Were there any hidden costs or surprises in the contract?
• How much did they initially invest? How long did it take them to earn it back?
• If they had the chance to do it all over again, would they choose the same franchise?
• If they left the program, why? After how long?
• What are their most and least favorite aspects of this company's franchise system?

These conversations will be invaluable as you compare different franchises.

Fourteen states require franchisors to keep their UFOC and other information on file with the state: California, Hawaii, Illinois, Indiana, Maryland, Michigan, Minnesota, New York, North Dakota, Rhode Island, South Dakota, Virginia, Washington, and Wisconsin. You can get in touch with the state agency to find out more about the company and see if they are in compliance. Contact information can be found at http://www.ftc.gov/bcp/franchise/netdiscl.htm.

Of course, there are other sources you should turn to besides the UFOC. Read press coverage of the company, both for the news and to see how the company is characterized. Check with the Better Business Bureau to see if there are any consumer complaints about them. Request a credit report, if possible, for more detailed financials.

Be careful when doing your research - there are plenty of franchise opportunities that are either simply bad investments or deliberate frauds. Remember, if the opportunity seems to good to be true… it probably is. Any franchisor that asks for money before giving you the UFOC is breaking the law - and probably a fraud. Also watch out for trendy franchise concepts and fads - a solid business model and proven success is more important than "buzz" or hype.

Beware of Business Opportunities
As you consider your options, you may run into companies touting "business opportunities". Business opportunities are similar to franchises, in that you are buying a business plan, but are considerably less formal. Usually you buy only the plan and materials - they do not include the right to use the company's name, ongoing support, or any restrictions on your business. They are much less expensive - and also less regulated. Be wary of unscrupulous companies peddling scams designed as business opportunities.