Franchise Prospector » Research & Buying
How Do I Know if the Opportunity Is Legitimate?
Researching Franchise Opportunities
One of the greatest fears that can strike an investor is the thought that an individual or an organization might run away with the money or - more likely - that the endeavor invested in might completely flop. When seeking a franchise opportunity, there is rarely an instance in which this fear being diminished. While the vast majority of franchise opportunities out on the market today are legitimate and likely to be highly advantageous to the potential franchisee, there will always be an element of fraud that must be identified. That's why more and more investors who are seeking a franchise opportunity of any sort are becoming increasingly aware of what to look out for. Certain signs such as an abundance of litigation directed at the franchisor company and-or the organization's lack of important, government required papers are easily decipherable as flashing red sirens.
Yet while many investors are able to recognize these signs eventually and avoid becoming victims of major fraud - or simply bad investments - they often expend a lot of time and energy with phony franchisors before realizing the organizations' flaws. That's why the real winners in the game are those who can detect these warning signs early on and thereby save hours upon hours of time and energy that might have been spent in negotiation with an unprofitable prospective franchisor.
Interestingly, however, one of the first things to look out for in a franchisor is an overemphasis on getting the deal done quickly. While it is quite normal for investors seeking franchises to spend a minimum of six months (and probably more like a year or so) researching available franchise opportunities, one can easily pick out a nefarious franchise dealer - or broker - by his or her insistence on getting the papers signed and the money transferred within a month or two. Indeed, it becomes evident in such a situation that despite the rapidity of the negotiations, one is still wasting every moment that he or she stays on in the talks.
Another important tool for determining the legitimacy of a franchisor organization is the UFOC packet. This extensive document that provides information on the franchise company is required by the government and in most normal situations is given to the prospective franchisee right away. At the very least, this document is required by law to be provided to the buyer no less than ten days before any money is exchanged. Calling a phony broker out on this will certainly prevent one from losing any investment money, but at that late hour a lot of the investor's time will have been wasted already. That's why it is always wise to request this document right away if for no other reason than the fact that it contains essential company information that is quite useful for the investor in determining what will ultimately be the final decision.
In fact, once this packet is obtained, the savvy investor should look over a few of the important items including number 20. This is due to the fact that item 20 lists the number of franchisees that have opted out of the system in the prior three years. Although it is hard to gauge the acceptable level - there are many factors for high turnover other than a franchisor's possible incompetence - it is still advantageous to confront the franchisor if the numbers appear at all to be strange.
Another highly useful section of the UFOC pamphlet is found in item 3. This gives the reader a 10-year record of every piece of litigation enacted in opposition to the company. While there is always the possibility of frivolous lawsuits having been filed, it is important that a prospective franchisee go through this section carefully - it is recommended to do so with a qualified attorney, as well - so that one can develop a sense of just how ethical the franchise organization really is. And on the topic of ethics, take a look at item 19 to see if the company is reporting the projected earnings of its franchisees. While the chances are that this section is not completed, a blank item 19 prohibits a company from making any statements about projects earnings. If a company's representative does disclose earnings - even though item 19 is not filled out - then this could be the sign of an unethical organization.
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