Stick to the path: get your trip down franchise-buying lane off on the right foot with a little how-to help

Entrepreneur, Jan, 2003 by Andrew A. Caffey

Digging into the franchise mine for that perfect nugget of a franchise program presents a serious challenge: not finding willing sellers, but rather, being swamped by the number of programs from which to choose.

The best defense you have against the franchise-selling onslaught is to have a sharp idea of what will bring you happiness and what you can afford. This requires some planning before you jump into the marketplace. Jot down your real interests in business ownership. Do you want to own a business that serves the general public? Or would you prefer to cater to business customers? Are you nuts about specialty foods? Do you need part-time work or high levels of flexibility? Do you want to get family members involved? The planning questions are endless. The point is to think out your personal business goals. As any navigator will tell you, if you don't know where you're going, you won't know when you've arrived.

The sources of information on franchises are plentiful. One of the easiest ways to get a feel for the marketplace is to attend a franchise and business opportunity trade show. A handful of organizations run trade shows in major cities throughout the year.

When you get to the show, spend a few minutes going over the exhibitors listed in the show brochure. Identify companies you recognize and especially those that fit into your planning profile. Work your way through the aisles systematically, stopping by every booth you've noted in your brochure. Dress for casual business. Leave your personal business cards with companies that interest you, and plan to follow up for more information.

The Internet is an indefatigable source of franchise information. The hype-to-fact ratio is high, but you can gather a lot of basic information. Check out Entrepreneur's FranchiseZone for comprehensive sector coverage. Magazines and books also offer good material, including my new book, Franchises & Business Opportunities. And don't hesitate to contact a franchisor directly for program information.

Once you've identified a few franchise offerings that intrigue you, it's time to dig deeper. You probably have a collection of promotional information, and that's fine as far as it goes, but as a franchise investor, you have a great advantage over people buying an independent business: the Uniform Franchise Offering Circular. The UFOC is an offering prospectus prepared by every franchisor, required by law to be delivered to a prospective franchisee at least a couple weeks before the contract is signed or you invest money in the franchise. What a gold mine of information! A UFOC contains a sample copy of the franchise agreement, a set of financial statements to tell you about the financial health of the franchisor, and a running description (in plain English, no less) of the key aspects of the franchise investment:

* The business background of the franchisor, and its key executives, as well as the company's litigation and bankruptcy history

* The franchisee's fees and total initial investment

* The purchasing requirements and product restrictions imposed on the franchisee

* Financing offered by the franchisor, and other franchisor obligations under the franchise agreement

* Your territorial, patent, copyright and trademark rights

* A summary of provisions describing renewal, termination, transfer and dispute resolution

* Earnings claims and system performance information

* Statistics about the national franchise system, including a list of the names, addresses and telephone numbers of franchisees in your region

Read this important document. Get franchisor representatives to answer all your questions, and leave no stone unturned. Take the UFOC to your accountant and a good attorney, so you know exactly what you're getting into.

The single most important step in your franchise evaluation is to talk to current franchisees. Use the contact list in the UFOC, get in your car and visit their businesses. Find a convenient time to talk to the owners and find out what they like and don't like about being a franchisee.

How Uncle Sam Protects You

As a franchise buyer, you need Uncle Sam. Here's how the government helps to protect you from illegitimate franchises:

* The Feds: For more than two decades, the FTC has been in the business of insisting that prospective franchisees receive full presale disclosure. The FTC's Franchise Rule, adopted in the dark ages of the past century (OK, 1979), requires franchisors to deliver an offering disclosure document the size of a small phone book to every prospective franchisee at least a couple of weeks before the contract is signed. The intended result: fully informed franchise investors. Franchisors aren't required to register or otherwise file with the FTC; they satisfy the Franchise Rule by delivering full disclosure on time.

The FTC may bring an enforcement action against any franchisor that doesn't meet its disclosure obligations or exhibits more serious problems. Most of its cases have targeted business opportunity sellers, not franchisors. The FTC's Web site is a great source of information.