How to Avoid Franchise Pitfalls

While franchising is often promoted as an opportunity to buy into a proven business model, owning a franchise carries no guarantees. No matter how well a business is designed, or how often the model has worked elsewhere, fledgling franchisees discover each year that no business — not even a so-called proven one — is foolproof. To make matters worse, some franchisers over-promise and under-deliver. And franchising also has its share of outright scams designed to fleece unsuspecting, would-be entrepreneurs out of their money.

Here is a short overview of some common trouble spots.

Training is one area where franchisers often fall short. A new franchisee may think he or she will get a lot of training, only to find out it’s a one-week crash course.

Competition is another source of potential trouble for franchisees. With hundreds of franchisers vying for a slice of their markets, some sectors are jammed with competitors. Crowded fields include motels, senior care and oil changes.

Even when a franchise succeeds financially, it may not be satisfying to the franchisee. For instance, a frequent franchising come-hither is the chance to be one’s own boss. Yet that may not turn out to be quite the case, as a franchisee typically must rely on the franchiser to call the shots.

To protect yourself against scams, the best advice is to take your time. If a seller tries to get you to invest as quickly as possible, it’s a warning sign. In general, the more promising the pitch, the more cautious would-be entrepreneurs should be in considering it.

Regulators emphasize that before potential investors write any checks, they need to read and be sure they understand the disclosure documents — called Uniform Franchise Offering Circulars — that franchisers are required to file in certain states. In places where these documents aren’t required — which includes most states — prospective buyers should insist that the franchiser supply them anyway.

Some experts warn that most franchise contracts are designed to put the franchisee in a weaker, disadvantageous position. And some point out that while regulators mandate franchisers provide a circular, they don’t review these documents for truthfulness. At best, offering circulars may be hard to understand. So it can be a good idea to consult a professional such as an accountant or lawyer with some experience in franchising.

In studying the disclosure documents, it’s particularly important to look at the pages showing franchisee turnover. Typically, names and phone numbers of former as well as current franchisees are listed. Contacting some former franchisees and asking why they’re no longer in business often can save the inquirer from a similar outcome.

Too many would-be franchisees don’t do nearly enough homework before signing on the dotted line. Experts caution those enamored of a franchise investment to undertake a dispassionate analysis of the opportunity before making a commitment.

Wall Street Journal Online, February 11, 2009

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