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September 21, 2017

10 Questions to Answer Before You Affiliate with a Franchise

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10 Questions to Answer Before You Affiliate with a Franchise

If you’re thinking about joining a franchise, you’ll be asked to read the franchisor’s uniform franchise offering circular (UFOC). It’s a standardized document required by federal regulators to help you determine whether affiliation is right for you. Here are some of the things to look for in the UFOC or to ask after you’ve reviewed the document.

  1. How much will affiliation cost you up front? In addition to paying franchise fees, you will need to change signage, business cards, maybe even the color of your carpet. In the UFOC, franchisors typically provide a wide cost range, say $21,000 to $250,000, depending on your size and existing technology, among other things.
  2. What ongoing value do you receive? Does the value of affiliation—brand recognition, training, technology support, referrals, and so on—outweigh what it’ll cost you in ongoing royalty payments and other fees?
  3. Do the franchise executives have a record of success? Use the executive bios required in the UFOC as a starting point. Investigate whether executives have been involved in bankruptcies or a lot of litigation. If a bio shows the exec had been with a certain company and your investigation shows the company went bankrupt during the person’s tenure, you’ll want more information.
  4. What are franchisees earning? Disclosing what its franchisees make isn’t required for the UFOC. But if the information isn’t included, ask why, because the franchisor requires its franchisees to report that information.
  5. Are franchisees leaving? Strong recruitment doesn’t say much if it masks an equally strong exodus of existing franchisees. Since the UFOC only reports recruitments and departures in the aggregate—for instance, if 20 franchisees left in 2004 but 21 joined, the UFOC will report a net gain of one franchisee—dig below the surface.
  6. What’s the franchisor’s main source of growth? If the UFOC shows the company is making the bulk of its money from new franchisee fees rather than ongoing royalties from existing franchisees, the franchisor might not be fit for the financial long haul. Look for details in the footnotes of financial statements.
  7. What do existing franchisees say? The UFOC requires franchisors to give you contact information of existing and past franchisees. Take advantage of that to obtain their opinion on whether affiliation was worth the cost.
  8. How litigious are franchisees? Lawsuits are an issue for any big business, but a lot of cases by disgruntled franchisees are a red flag. Lawsuits must be listed in the UFOC.
  9. Is your territory protected? The UFOC may list existing and future franchisees that will be competing with you in your neighborhoods. You’ll also want to find out if there’s an assurance of exclusivity in the way franchisees are treated online. That is, if someone searches for property in your market, will your office and listings come up first? If territory information isn’t in the UFOC, you may find it in the office manual. But typically you can’t take manuals out of the franchisor’s office.
  10. Is the UFOC professionally prepared? Mistakes, typos, and inconsistencies in data reflect poorly on the franchisor. Do you want to affiliate with a seemingly sloppy company?

Source: Eric H. Karp, Witmer, Karp & Warner LLP, Boston

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