When constructing an organic, linear document such as a blog, it is occasionally useful to circle back to the beginning and restate the basics of what we are trying to address. In this case, we are a franchise law blog and as such, we are speaking to individuals who practice law in that space and to people who buy, sell and operate franchises.
So let’s go back to square one, buying a franchise. Next week we’ll look again at the basics of selling franchises, then we can delve once again into the labyrinthian laws and regulations concerning those activities. To the franchise buyer, this is directed at you. Those selling to you and advising you should also take note:
Smart Franchise Investors Do Their Homework
Smart investors know that hours of research must be done before deciding to invest in any venture. Making an informed decision about investing is particularly important when a person is considering opening a small business or franchise. The Small Business Association reports that one-third of all new businesses fail, one-third break even and one-third are successful.
Starting a business is a huge investment of time and resources and those looking to undertake such an endeavor need to make sure they are making a sound investment and protecting themselves against fraud and abuse.
The Federal Trade Commission (FTC) offers important advice for those looking into investing in franchises, including examining a franchise disclosure agreement and consulting a variety of professionals for advice.
One of the most important first steps the FTC recommends franchise investors consider is making sure to examine the franchisor’s disclosure document. The document contains important information regarding the franchise including:
- Franchisor’s background
- Business background
- Litigation history
- Bankruptcy filings
- Initial and ongoing costs
- Current and former franchisees
Potential investors should not be afraid to ask questions for clarification about any information that is confusing before signing any kind of franchise agreement or investing any money. Under the law, an investor has a right to receive updated disclosure information before signing any agreements.
Other Resources for Information
In addition to reviewing the disclosure document, the FTC recommends potential franchise investors look to a variety of sources for information regarding the viability of the investment including:
- Associations of franchisees operating similar outlets: These organizations can offer investors insight into potential problems and benefits they might encounter with a particular franchise.
- Experienced Business Lawyers: Franchise attorneys possess specific experience and knowledge and can help investors understand their rights and responsibilities and inform them about any state laws governing franchises.
- Accountants: Certified Public Accountants can help investors examine a particular company’s financial statements found in the franchise disclosure agreement and also help assess the financial health of the company.
- Banks or other financial institutions: Through a financial profile, banks can also provide a disinterested analysis of the financial condition of a company for the investor.
- The Better Business Bureau: This non-profit organization stresses ethical standards and keeps records of consumer complaints against businesses. The BBB, as it’s known, can provide investors with consumer feedback about the venture.
- Government entities: Agencies like the Federal Trade Commission and state attorney general offices enforce laws that govern franchises on the federal and state levels. Along with attorneys, these entities can help investors understand their rights and responsibilities under the law.
It’s important for potential investors to utilize any and all resources available to them before making any investment decision.