Part 9 of the AAFD’s 10-Part Road Map to Buying a Franchise.
Sure, a franchise company might have a great sales pitch filled with big promises, but even though a franchise might sound like a Lamborghini what you could really end up with is a lemon. Do your due diligence and make sure the franchise you’re looking to invest your money, blood, sweat, and tears in is the real deal.
Here are six things you absolutely need to do when evaluating a potential franchise opportunity to make sure you’re not being duped by a dud.
Research, Research, Research
Deciding to buy a franchise should not be a swift process. Take your time. Educate yourself about the franchise industry (check out our blog posts on top franchise books, online franchise resources, and other great franchise resources), and then research your particular franchise. Google them—in particular, seek out and investigate posted complaints. Talk to franchisees. Learn everything you can about their company and franchise process.
Read the FDD Carefully
When you get serious about buying a particular franchise, and the franchisor offers to sell you a franchise, your prospective franchisor is legally required to provide you with a Franchise Disclosure Document (FDD) as mandated by the US Federal Trade Commission and various state laws. Study this document carefully and don’t be afraid to ask the franchisor any questions you have. You should have the FDD reviewed by a qualified franchise attorney and your financial advisor. An experienced franchise attorney will be able to explain the intricacies of the franchisee agreement and relationship, and will be able to spot and advise you of some of the traps that you might not recognize.
Understand the Details
It’s not just enough to know about the franchise company, you need to be fully aware of what you as a franchisee can expect. Make sure you know:
- What the start-up costs will be
- How much your products and supplies will cost, and whether your pricing affords you a reasonable return on your investment
- Everything the franchisor agrees to provide, and everything you promise to provide your franchisor
- The franchisor’s training protocol
- Your site and territorial rights
- Your rights and obligations if your expectations (or your franchisor’s expectations) are not met
- Your rights upon renewal and termination
Also make sure you have a strong awareness of your competition.
It’s imperative that you keep all of your research and notes in an organized and easily accessible manner. Make sure you also record ALL conversations you have with the franchisor and include notes on the date, time, person you spoke with, promises that person made, the questions you asked, and the answers you received. Some clients like to make physical folders and handwrite their notes, while others will do everything on their computer or tablet. It doesn’t matter how you keep your records as long as it works for you.
Know The Franchise’s Background
Look into the business and financial backgrounds of the franchise you want to buy and its owners. If you find things like bankruptcies or franchisee complaints, then those are huge red flags. Franchisors are required by law to disclose any litigation in their history. Make sure to ask for it. Again, in today’s world, Internet searches can yield valuable information. Ask the hard questions and insist upon reasonable answers.
Keep Your Franchisee Success Team Close
In a previous blog, I explained the importance of building a “franchisee success team” , which should include yourself, a franchisee organization like the AAFD, a franchise lawyer, and an accountant experienced with franchised business, or other financial expert. Keep your team members in the loop as you perform your franchise research. Don’t be afraid to ask them questions or ask them to review any materials that you have concerns about. If you’re still working to build your team, consider tapping the AAFD’s Franchisee LegaLineSM for a franchise lawyer or our FinanciaLine for a franchise financial expert.