Wednesday, August 11, 2010

Franchisee 101 - What Should I do Before I Purchase a Franchise?

I often get calls from recently downsized people who want to buy a franchise.  What do I need to do first?  What is the best type of franchise for me?  Luckily, I have a great resource in Barry Kurtz, PC, a great franchise attorney out here in California.  He recently sent out a newsletter with a great introductory article on becoming a franchisee.

You must conduct substantial due diligence (research all available information on the franchise system and industry) before purchasing any franchise. You should start with a comprehensive review of the Franchisor's  franchise disclosure document (FDD). The FDD outlines key provisions of the franchise agreement and also provides crucial information about the franchisor. Review it with an eye to these points:
  • Compare franchising opportunities within the industry you are interested in to determine which franchise is best suited for you and which franchise may be the most successful. Once you have chosen to purchase a particular franchise, speak with as many franchisees in that system as possible, including franchisees recommended to you by the franchisor as well as those that were not.
  • Is the FDD current? A FDD expires after a year. You should insist upon seeing the currently registered version. If it is close to a year old, make certain that a newer version has already been written or submitted to the governing agency for approval.
  • Study the audited financial statements attached to the FDD, particularly the most recent one. By studying the financial statements, you should be able to determine how successful the franchisor is and how successful its existing franchisees are. Question any aspect of the statements that aren't clear to you. Ask your accountant to review them and provide feedback to you.
  • Visit the franchisor's headquarters. Do they appear to have the resources that are needed? Does personnel appear to be competent?
  • Prepare a business plan. Be as realistic as possible with your projections.
  • Get actual numbers whenever possible. Ask your accountant to review the plan and provide feedback.
  • Ask probing questions. 
Barry Kurtz is available to assist you in reviewing the FDD and in overseeing your purchase of the franchise.  Once you purchase your franchise you will need a qualified business attorney to help you navigate the legal maze of running your franchise.  I can assist with that.  If you have any questions regarding anything in this post, please contact me at The Out-House General Counsel or (951) 737-4040 ext. 2.


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