10 danger signs to look for when buying a franchise: no-risk guarantees, customers' complaints and tough termination terms are just a few things to watch out for - includes trade association resources - Cover Story

Black Enterprise, Sept, 1994 by Joan Delaney

SHOPPING FOR A FRANCHISE can be like walking into a lion's den: There are lots of hungry franchisors looking to eat you up and spit you out. Although many franchisors practice the highest ethics, others are unscrupulous and will use shady tactics to get you to buy.

There are an estimated 550,000 franchised businesses operating in the United States. The number is growing by about 6% a year, according to the International Franchise Association in Washington, D.C. In retailing, franchised businesses account for more than 40% of the total sales volume, and this figure is expected to increase.

However, potential franchisees should not be baited by the promise of quick profits, low initial investment and freedom to be their own boss. When evaluating a franchise, too many entrepreneurs disregard red flags and fail to completely examine the franchisor or the contract, according to Robert L. Purvin Jr., a franchise attorney and author of The Franchise Fraud (John Wiley, 1994, $27.95).

Many people think the Uniform Franchise Offering Circular, a disclosure document required by law, is a stamp of approval by the government. Actually, the circular provides a jumping off place for you to begin your own investigation.

Start by talking to other franchisees. "Potential franchisees are foolish if they don't take advantage of this valuable resource," says Lewis G. Rudnick, a partner in Rudnick & Wolfe, a Chicago law firm specializing in franchising. The Federal Trade Commission requires franchisors to list the names of at least 10 franchisees operating in the applicant's vicinity. In addition, you should poll franchisees in various parts of the country to get a more complete picture. Then, you need to scrutinize the circular to separate the wheat from the chaff. Here are 10 franchise danger signs. If you see one or more of them, run.

ONE

Too-good-to-be-true promises of training, guidance, and marketing support. The most common complaint among franchisees is the lack of adequate training and ongoing support. Talk to other franchisees to see if they learned everything necessary to run the business. One week's training hardly prepares a neophyte to launch a new venture. Check to see if management offers assistance after the business opens. Is the home office available for help when unusual problems arise? Are there specialists in site selection, marketing and promotion?

When Ouida Alderman bought an interior design franchise in Pensacola, Fla., she was told she'd learn everything she needed to know to run the business, which provides decorating services to residential clients. "What a laugh," she recalls. "The training was so fast and furious there was no way I could absorb everything in a few days."

Alderman was also assured she would get ongoing assistance once she opened. However, her district manager knew little about the business and was no help. "She didn't even know how to measure a couch for slipcovers," reports Alderman, who went out of business in about six months. She and six other former franchisees in Florida are now preparing to file a suit against the franchise company.

Beware of the franchisor that collects advertising fees and uses them for other purposes, or advertises on the West Coast, which doesn't help franchisees in the East.

Watch out for fraudulent marketing schemes. A franchisee who owns four hotel outlets in the South, complains about having to kick in thousands of dollars last summer to help promote a $1 million contest for hotel guests. "Management never announced a winner," he fumes. "When I questioned them about it, they said no one qualified." He plans to sell his hotels and work with a more reputable hotel franchisor.

TWO

Poor quality products or services. No matter how great the franchisor's system, a franchise is only as good as what it sells. Check out customer complaints, consumer ratings and other barometers of quality and customer satisfaction. Are prices competitive? Beware of franchisors that require you to purchase supplies from approved vendors. Other suppliers may be able to provide the same equipment at a better price. Is the market declining for the product or service? "The demand for video rentals is likely to dwindle," predicts Chicago-based franchise consultant Donald Boroian, CEO of Francorp Inc. "New technology now lets you rent movies over the phone at the same price you'd pay at a store."

THREE

Rigged for failure. Some greedy franchisors set up a number of franchisees to fail. For example, when a franchise goes under, it's often sold to a new operator who is unaware of the situation. The former owner may have antagonized customers and given the business a bad name. So the new operator has the burden of overcoming customer resistance.

This scenario occurred when a woman in New Jersey unknowingly bought an interior design franchise that had failed twice. "Not only had the two owners created bad will, but they didn't cancel their phone numbers," she says. All calls from potential customers were forwarded to the home of one of the former franchisees, who had her own design business.