Franchisees Proceed with Caution

by Ed Teixeira

Before signing on the dotted line be sure your due diligence is complete

When prospective franchisees search for franchise opportunities they have the advantage of accessing a wealth of information. This information can be found on the Internet and in various books and articles dealing with the subject of franchising. There are state websites and the FTC website. There has never been so much information available on the subject of franchising as there is in the past several years.

However, this vast amount of information can represent a double-edged sword. On the one hand individuals are able to learn about franchise opportunities, how to evaluate a franchise and the steps to follow in purchasing a franchise. Conversely, there is the danger that the availability of this information may lead a prospective franchisee to think that they need not rely upon professional expertise. I would use the example of the various Internet sites that deal with healthcare. Its not uncommon for people to go on the Internet and visit a healthcare site, which describes the symptoms for a variety of illnesses, and perform a self-diagnosis without ever visiting a doctor. Hopefully, people who do this exercise good judgment and visit a doctor when appropriate.

In the case of evaluating various franchise opportunities I encourage individuals to learn as much as possible about the entire franchise process. This advice includes knowing what questions to ask about the franchise, evaluating the franchisor and interviewing existing franchisees of the franchise being considered. There is one aspect of franchise due diligence that must be completed before signing the franchise agreement and paying the fee. A prospective franchisee must have a franchise attorney or competent franchise consultant review the franchise offering circular. Whether this review is done at the beginning of the franchise process or at the end it has to be done.

I recently encountered a prospective franchisee that was in the process of purchasing a franchise. At the last minute I was requested by this individual to review the franchise offering circular. What I found was startling. Not only did the franchisor fail to meet basic FTC disclosure requirements but also the franchisor was selling from a registration state without having registered the UFOC. After my findings were presented to the prospective franchisee he contacted several existing franchisees. He found that none of them had used a franchise attorney or consultant to review the franchise documents!

For those who are close to the stage of purchasing a franchise be sure you have a franchise attorney or competent person review the franchise documents.

The items that they should review include:

• That the Uniform Franchise Offering Circular (UFOC) provides the required disclosure including format and content and complies with FTC regulations.
• If the Franchisor is selling from or into a franchise registration state that it is registered or has filed in order to offer franchises.
• That key commitments or promises made by the franchisor are reflected in the franchise agreement. Specific sections, to include Franchisor Obligations, should include these items.
• That the franchise agreement does not contain any onerous provisions for the franchisee. An example would be a non-compete provision that exceeds franchisee obligations that have been struck down by the courts.
• The financial statements of the franchisor demonstrate the ability to service and support its franchisees.
• Any negotiated items between the franchisee and Franchisor are properly documented.

In today's world of virtually unlimited information prospective franchisees need to access competent franchise advice. Performing a complete and thorough due diligence on the franchise opportunity and franchisor is the most effective way to protect your investment and minimize your risks.

As I often tell prospective franchisees: "Its far easier for a franchisor to recover from the choice of a wrong franchisee than it is for a franchisee to recover from the choice of the wrong franchisor."

Ed Teixeira is the President of FranchiseKnowHow, LLC a franchise development firm based in StonyBrook, NY. www.franchiseknowhow.com. He can be reached at ed@franchiseknowhow.com