Buying a Franchise – Evaluating Franchise Investments and Franchise Disclosure Documents – Tips From a Franchise Expert and Franchise Attorney

Millions of people dream of owning their own business. Having the independence that being your own boss brings, the security that nobody can fire, enjoying a good income – and for the most successful – the accumulation of wealth and prosperity. Unfortunately, the cards are stacked against a new small company doing big – or making it at all. A host of problems makes competition from large, sophisticated chains too intense. Many new start-ups so as failures.

Buying a franchise represents a different approach to starting a business. Franchise fee for a more advanced course in royalty payments, the parent teaches their business models and methods to the franchised-operator who shoulders all the responsibilities and financial functioning of the outlet. Some statistics are impressive: it is said that over 40% of all U.S. through the retail establishments are franchised. While franchise giants like McDonald’s, KFC, H & R Block and Radio Shack are familiar, household names, franchises are available in a wide range of industries. The list of 3000-plus companies selling franchises more than 100 categories of industry.

American Dream … or nightmare?
But just as franchising represents a chance to get rich, it’s also a chance to get bitten. An alarming number of franchised operators for less than minimum wage, working seven days, sixty to eighty hours a week, pursuing an expensive and elusive American dream becomes a nightmare. Given that the current franchise fees from the upper right, as a percentage of gross sales or a fixed minimum amount, the company franchising ensures a revenue stream, even if their units are operating and franchising unprofitably sold over and over again to new, unsuspecting buyers. Internet is full of comments from many people who lost $ 250,000 and more on concepts like eBay Drop off stores (It Isolde), 30 Minute Fitness concepts (Curves), The UPS Store, etc. Yet many of these companies and continue selling resell franchises over and over again. How to achieve that? Because there are enough people who think they can “believe” their way to success, even with a business concept or does not work in the market. As explained below, in many cases, investment decisions are incredibly franchise based on emotion, not business logic or even common sense.

Property and be your own boss?
Pride of ownership and be your own boss is highly touted phrases in franchise recruitment ads. But these are more fantasy than reality. Although you get all the financial exposure, headaches and stress of business ownership, what really counts? A franchise owner is merely licensing a trademark (or service mark) of a company that dictates every aspect of business operations. So the boss is not true, but the company that sells franchise rights. . . sea and the obligations of the franchise.

Build equity?
But at least you build equity, the property value of the business as a going beyond their investment money to compensate all those years of hard work and long hours – right? Wrong – at least in the world of franchising. The company reserves the rights to franchise your business to purchase all wholesale prices, if your contract is not accurate. The acquisition of rights to provide previously based assets, such as book value or liquidation. These valuation methods provide a minimum compensation (the value used for some file cabinets, office furniture, equipment, etc.) and are not generally used to determine the selling price of any business.

Absolutely not be paid compensation provided by the goodwill, the value of a business that generates $ X in the consolidated cash flow every month after years of effort, investment and expense – thus eliminating the property of the most valuable assets. Of course, you may be able to sell his franchise to a third party for a price that includes a valuation based on revenue. But that is only possible if:
(a) you can find a buyer who is willing to live within the complexities of a franchise and
(b) you own a franchise that shows the health benefits.

Following is a bottom-line advice and franchise list compiled by the franchise lawyer and franchise expert, Mr. Franchise, based on a review of over 500 franchise offering circulars and twenty-eight more years of experience in the franchise industry – including ownership of a very successful franchise. These factors to consider in making a franchise investment will help eliminate 95% of companies are considering. You can then concentrate their efforts on the 5% cream of the crop “companies that may deserve consideration. Franchise This list assumes that you are capable and willing to live within the limits of a franchise relationship. It also assumes the franchise company:

(1) has successfully operated the franchise concept for at least five years in several locations;
(2) is unaffected by the dispute franchise, franchises and demands of disgruntled franchise owners;
(3) is not unusually high franchise fees (owners who have “left the system), and
(4) has a balanced, fair franchise contract.

It is SOLD – A dream that became a nightmare
An example of a franchise company in trouble that do not meet basic standards ISOLDE threshold is that a decline in eBay store franchise. The company launched its first and only company-owned store in November 2003. A few weeks later, on December 10, 2003 submitted an application to sell franchises. The California Department of Corporations has not said “What are you thinking? You’ve been in business only a couple of weeks, how can you even consider the sale of franchises?” Nor need this be disclosed as a risk factor in the cover of the Franchise Offering Circular, as it should have. Responsibilities ultimately rest with the release of the company (and their lawyers) and this will become one of the many issues in future franchise litigation.

Instead, the Department simply collected its $ 675 fee and issued an order declaring the franchise registration effective the next day – on December 11, 2003. Then the magic of the franchise was in charge of marketing. In 2006 the company had nearly 200 franchised stores in operation, and leave was promoted by Entrepreneur magazine as # 1 on its list of “Top New Franchises for 2007″ and # 17 in its “hotter than hot” franchise list. Entrepreneur magazine, which requires franchise companies to submit their FOC’s (Franchise Offering Circulars) accounts for each year before they are listed, does not consider the high attrition rate (franchise owners leaving the system) or that the financial audit in their FOC showed the company had not operated profitably since 2004 as the negative and grave Isolde was awarded the # 1 Top New Franchises list for 2007. How does this happen? It’s another bizarre reality in the world of franchising.

The franchise of the company audited financial statements for the year ended 12-31-05 showed an operating loss of $ 1.1 million. Nine months later, in September 2006, the net operating loss increased to over $ 4 million.

In its November 3, 2006 Franchise Offering Circular, the table in Item 20 disclosed a total of 10 franchise owners leaving the system, however, have a hand of 3-D test ex Franchisees ” revealed a significantly different number – 44. The same “discrepancy” exists about franchise transfers. Item 20 says that the transfers that Annex 12 shows 3-D 27.

In a letter circulated long as the owners of franchise April 5, 2007, CEO Ken Sully painted a dire picture of an American dream that has become a nightmare. Mr. Sully’s letter admitted the company has not been profitable since 2004 (in line with financial audit, the company showed an operating profit of only $ 356,286 in 2004 before the precipitous downward spiral of 2005 and 2006) . Over 60 franchised stores have closed and many more are struggling to survive. Mr. Sully observed “Unfortunately, many people who believe fervently in the potential of the category have lost significant investments, including homes and retirement savings.”

Lost homes and retirement savings? How could such a travesty occur? I advised a number of people considering a franchise Isolde and warned them against the investment. Fortunately, following my advice. The idea was never tested in the marketplace before franchise efforts began, violating the most basic precepts Franchise 101. I also felt the management team lacked strong franchise credentials and training of five days was woefully inadequate. Finally, the franchise company was operating increasingly in the red and had a high rate of attrition (owners leaving the system). It did not take much brain power to see this was an accident waiting to happen. I predicted that the bubble burst and, sadly, yes.

Common sense could and should have prevented many people from losing so much. Unfortunately franchise sales persons appeal to emotions (passions and potential, to use Mr. Sully terms) and try to keep common sense and business logic out of the equation of purchase. If a franchise company can obtain a qualification within a media list, the sale is even easier. Reprints high rank on the list, such as Entrepreneur magazine, is included in the franchise package to buyers, which are a false sense of security and start tripping over each other in a race to register before someone else has your desired territory (another favorite closing technique used to sell franchises).

Isolde is! amended its FOC at the end of May 2007 to add some risk factors has long been the language of the cover of its Franchise Offering Circular. Hmmmm … maybe they read my comments and that over a bit of research. The new home FOC risk factor language says “franchise system is new and still unproven.” That is very interesting. How can you say that a franchise system, which is approaching its fourth anniversary, is “yet again? Perhaps we are looking at things from a “how old is our universe perspective? The word” unproven “is another play on words. The result is certainly in the sense that many people, to quote Mr. Sully, “have lost significant investments, including homes and retirement savings.” So why not use this quote directly in their Franchise Offering Circular Answer: you can not sell any franchise in this way.

In an August 31, 2007 Business Week article, CEO Sully claimed it was not necessary to disclose these risk factors in the FOC. His reasoning: “We told everyone that this is the sort of wild, wild West,” he says. “It’s a new concept and nobody knew for sure where it goes.” The disclosure has been recently added to the UFOC, said, “because the number of stores that were not understanding the complexity of the business.” Hello? Do not tell your franchise investors after the fact what they were required to disclose in the FOC before they bought so they could make an investment decision. That is the purpose of the franchise disclosure laws. And claiming written disclosure of risk factors in the FOC is not necessary if a prospective buyer hears a salesman’s verbal wild, wild West story ignores the responsibilities and disclosure of franchise is really a recognition of the company in this regard . With its modified FOC, the company remains incredibly marching forward with franchise marketing efforts.

Now, let’s examine the list of franchise and factors to consider before jumping into any franchise.

INDUSTRY TRENDS
The franchise is in a leading sector that is well now and is expected to do in the future despite any economic slowdown? Education and improving the home services are stable categories. The food is more saturated and in general, except in exceptional circumstances, not worth the investment, long hours, headaches and marginal revenue.

TOTAL INITIAL FRANCHISE INVESTMENT
In general, do not expect a franchise that requires a five-figure initial franchise investment to produce a six figure income. As with most things in life, you get what you pay for. Moreover, assuming a six-figure investment will lead to a six-figure income level. Be realistic and prudent. Is the total initial franchise investment range (including working capital) $ 125.00 or less and the maximum investment of less than $ 200,000? You can find solid companies in this series, if the investment you’re willing to look around.

Do not forget to consider long-term financial commitments, including the lease of real property (see below under “LEASING AND PLACE”). Also, the estimate of working capital (called “additional funds” in Item 7 of the franchise offering circular that) does not cover operations until the threshold of profitability. It only covers a short initial phase (usually only three months) of operating expenses in point (where revenues cover all operating costs) can not occur for one, two or more years, knowing only what is so you can take through the first 90 days is not helpful – in fact, you can set to financial suicide. In many cases, reaching the point can require more reserve funds than the total initial capital investment. Never forget the name of item 7 of the Franchise Offering Circular, “the initial investment.” If you do not have enough reserve capital to reach the critical “point, the entire investment to go down the drain and the lack of franchise occurs.

A franchise owner of a relatively low investment and low operating cost window cleaning franchise said his biggest surprise was the time it took the franchise to be profitable. Goes, he thought it would be 12 to 15 months. Taking over twice that time. Fortunately, there was sufficient capital reserves to be there, but refused to say what his current franchise profits or income level was reached after a “franchise profitability.” If you are operating just above the point of breaking and making less than minimum wage, is that no one definition of success?

REAL BUSINESS
Is it a legitimate retail business, as opposed to “work home” operation? The vast majority of work outside the home concepts produce marginal revenues at best.

FRANCHISE MANAGEMENT EXPERTISE
The management team of the franchise (the company that the sale of the franchise) have proven executive with past achievements and experience in running a franchise business (not just people who have sold franchises)? If not, this is a big red flag. Many companies enter into the franchise and not realize they are in a new business – one requiring entirely different management skills for navigating the franchise relationship. A management infrastructure must be seasoned franchise in place. If the management team lacked strong franchise franchise credentials, or receive advice from qualified people, and you can take a trip to Las Vegas with the money that is the intention to invest. Their chances to cope with losing money are approximately equal.

Normal working hours and days; SUFFICIENT FRANCHISE INCOME LEVEL
Does the nature of the business lets you work a five day, forty hours of work? Life is too short for the seven-day, sixty to eighty hours a week, work lifestyle that destroys health, family and pocketbook. Financially, we have calculated the true hourly rate for franchise owners who work these hours to work and discovered many are doing much less than the minimum wage. A couple who operated a $ 200,000 luxury pizza franchise in an upscale business were surprised to discover they were making fifty cents per hour each. Only one income level to recover the excess or to justify the investment. Many more fast-food franchise operators that much less, or operate at a loss until their funds for retirement savings, homes, etc. have been exhausted. Buying a franchise in a non-food industry does not necessarily improve the franchise profit picture. In 2006 an article titled “Mail Boxes Etc. Owners Fighting conversion UPS, a Mail Boxes, Etc. franchise owner who operates a franchise since 1993 reported profits of a typical MBE store like his were $ 16,000 per year after paying royalty and advertising fees to the franchise company. Estimated at approximately $ 8.33 per hour for a forty-hour work week, about the salary of an entry of fast food worker.

Another major shortcoming of disclosures in the Franchise Offering Circular is not telling you how much money the franchises in the network are doing. Instead of responding to what is the most important investment decision in a franchise, franchise disclosure laws that this “optional” for the franchise company to answer or not. If they do answer this critical question, it will be in line 19. But do not hold your breath – more than 90% of franchise companies “decide” not to answer this question. It’s another bizarre reality in the world of franchising. While compiling comprehensive monthly (and in many cases, weekly) financial profit and loss statements from their franchise owners, and know exactly how much their franchises are making (or losing), more than 90% choose not to share this information before buying one of their franchises. A number of franchise dealers who have requested that this matter, “the franchise laws do not allow us to answer that question.” Nothing could be further from the truth.

And just because you’re a business executive of a 6-figure income now, do not assume this income level will double investment in a franchise because the company “approves” your application. One such executive, despite a lot of negative feedback from current and former franchise owners who had lost everything, marched forward with its investment in excess of 30 minutes of fitness concept. 6 Despite his income figure, do not invest a penny in the assessment of franchise advice, and declared that she was taking a leap of faith, hope to build your wings on the way down. Build your wings on the way down? Sound (and is) crazy, but this happens all the time. Due to the maneuvers of the franchise salesman, franchise too many investment decisions are based on emotion. Before business skills, business sense (and common sense) are short-circuited. Needless to say, if this business executive made an investment decision for companies of your employer paying the 6-figure salary, which would be dismissed immediately.

Minimum number of employees
Can you operate the franchise business with 6 or fewer employees? Managing dozens (or in some fast-food operations – hundreds) of minimum wage teenagers who are constantly quitting or simply not appear for work is a real pain in the ….. Well, you know what we mean.

LEASING AND LOCATION
For most franchises retail, triple net lease of the site is the largest financial commitment, greater than the total investment franchise. However, the typical real estate lease and its ramifications are not required in any disclosure of the Franchise Offering Circular (FOC). For example, an estimate that it will need 2,000 square meters of space with expected rental of $ 5 to $ 10 per month, normally a foot in the Franchise Offering Circular of the initial investment in the table $ 10,000 to lease real estate $ 20,000. A footnote to the table of investment can say “is 2000 meters square at $ 5 to $ 10 a foot.”

But that’s just the beginning of a much longer history. Leases are usually for 5 to 10 years of triple net lease. Therefore, the financial commitment when signing the lease is at least $ 600,000 (a $ 5/foot to 5 years) to $ 2,400,000 (at $ 10/foot to 10 years). And this does not include substantial, additional obligations to pay all of the owner of the property taxes, insurance, common area operating expenses, etc. With hundreds of thousands (or millions) of dollars in financial obligations at stake, personal guarantees and other risks, rather than a warm fuzzy feeling that all work required.

The key questions to ask here:

(a) is the franchise you’re considering one that can be operated in a commercial low-rent area? Avoid franchises requiring the costly expenses and triple net lease for a retail store and rental extravagant visible associated with areas of high pedestrian traffic such as shopping malls. You sleep better at night.

(b) What is your total financial commitment under the lease?

(c) Do you have sufficient liquid assets (or a will, sufficiently liquid third-party guarantor) to meet with the owner of the lease qualification standards?

If you do not, you might as well forget about investing in the franchise. Or even worse, participate in a questionable franchise and business model, then you have a really big mistake – and discovering that you are personally in the chain of $ 500,000 + lease obligation.

Another option is to real estate in a lease in good time (with renewal options) to recoup their investment and profit. In July 2005, a lawyer in her mid-forties bought an ice cream shop franchise for $ 375,000 believing that this is a “once in a chance.” Trade in your briefcase for an ice cream ball, attended the company ’s 11 days of the Ice Cream University and assumed operations of the ice cream shop. It turned out it was an opportunity – but only to inherit a store with numerous problems. These problems include (but are not limited to) a lease which expires next summer and an owner who had previously announced the lease would not be renewed. Instead of paying $ 100,000 in relocation costs, the lawyer returned to the practice of law, but is still paying the remaining $ 350,000 loan to buy once in a lifetime opportunity to franchise. Although there is a lawsuit pending franchise, is another case of “franchise fever” – this time attacking a professional no less. Ever agree to pay $ 375,000 for a franchise retail without checking in the lease? Sound like another bad lawyer joke, but I can guarantee that any laughs. Business fundamentals were ignored or forgotten in the race to acquire the opportunity of his life. And I’m willing to bet a dollar not spent on competent, before the franchise investment advice.

IMAGE AND LIFESTYLE
How flipping burgers, lots of cleaning bathrooms and fit the image of what you do for a living? Investing in a franchise will be the most important financial and psychological decision making than ever. Many prospective franchise owners do not realize is that by using virtually every hat at one point, from Seller to bad-debt collector, from firing employees to bathroom door. The franchise owner is usually the first to arrive in the morning – and the last to turn the lights at night. And who will forget the business benefits such as paid vacations, paid holidays and sick pay. In its place, substitute financial pressures, unforeseen and drain money from their savings and retirement accounts. The typical day of work and responsibilities of the franchise who are considering fit your personal image and desired lifestyle? You may experience some of these before investing in work for a couple of weeks in an outlet owned by one of the current franchise owners.

TRUE VALUE OF FRANCHISING
Buying a franchise from a “blue chip” franchise company that has spent decades and hundreds of millions in advertising to develop their brand can do a lot of sense. These companies have “true franchise value” that compensates for the long-term drawbacks of existing funds and royalty payments for advertising. Often these additional payments literally mean the difference between earning a profit and operating at a loss. Unknown franchise chains with little or no brand recognition, franchise buyers who are building their brand from scratch and are loaded with serious long-term competitive disadvantages.

In these unknown franchise chains, you have to ask yourself a simple, common sense. What value is given to the company that you could learn about their own work in one of its facilities as an employee of a couple of months? Franchise in fact, know what most companies are selling the franchise is just a business opportunity – learning how to enter a new business. But unlike a business opportunity seller that charges a fee to help in business, they call a “franchise” and the current position of royalties and advertising fees are as a McDonalds or other blue chip franchise company.

The reality is that there are a type of franchise McDonald’s – not even close to one. In most of these lesser-known franchise chains, which is much better to start an independent business on your own. You can learn most or all of its so-called “secrets” in the franchise and the interview process to talk (and possibly a short period of work) for the owners of the franchise.

FRANCHISE AND PROFITABILITY “SUCCESS”
Dr. Timothy Bates study published in 1993 by Business Growth and Investment Institute in Washington, DC (and another study published in 1996) was the first to compare start-up costs, franchise profitability and franchise fees failure for business vs franchise nonfranchised. In its analysis of 7270 firms during the test, Dr. Bates found that startup capital for a business franchise average $ 85,293 compared with the average startup capital for businesses nonfranchised of $ 30,156. In 1987 the company reported nonfranchised average pre-tax net income of $ 19,744 compared with a loss (- $ 1548) for franchise businesses. Dr. Bates concluded “Despite their large income, much better funded, and its supposed advantages of affiliation with a franchisor parent company, franchisees young cohort lag behind in profitability and business survival rates. ”

The franchise companies ignore both studies by Dr. Bates, to pretend that never happened. Instead, other techniques are used. For example, some companies use misleading franchise success statistics to sell their franchises. Its promotional materials franchises generally enjoy a mean success rate of 90%, compared to less than 20% for independent firms. Estas cifras se basan en información no verificada proporcionada hace treinta años por un selecto grupo, no representativo grupo de empresas de franquicia. Un tercio de las empresas que reciben “cuestionarios” elegido no participar. No hubo verificación de cualquiera de la información suministrada por las empresas de franquicia, ni siquiera al azar, la comprobación in situ. Tampoco se hizo ningún esfuerzo para identificar las empresas de franquicia que, junto con los propietarios de la franquicia en su cadena, había salido de la empresa.

Aún más recientes “estudios” decir nueve de cada diez propietarios de franquicia (90%) consideran que su voto a ser algo o muy exitosa también sufren de graves defectos metodológicos. Estos son simplemente encuestas telefónicas de los propietarios de franquicia que se sigue en el negocio y pidió a decir (sin ninguna definición del término “éxito”) si se sentían que sus empresas era “muy pierda”, “pierda algo”, algo con éxito “o” mucho éxito. “propietarios de franquicia que había salido de las empresas en quiebra o no se incluyeron en la encuesta.

Incluso si se definen los términos y obtuvo una muestra representativa, los propietarios de franquicia puede ser un grupo de extravagantes. De ahí la necesidad, al igual que en el Dr. Bates estudios, para la revisión de los datos financieros. Me acuerdo de la evaluación de una franquicia existente de un cliente. Le pregunté a la actual titular de la franquicia en caso de que su negocio fue un éxito. Dijo que fue un gran éxito. Sin embargo, sus estados financieros revelan una imagen diferente. Nunca había dado un dólar de los negocios por sí mismo, nunca hizo una ganancia de dos años de funcionamiento, y estaba al borde de la quiebra. Otro propietario de una franquicia de panadería, entrevistado por Business Week, afirma que el éxito en la franquicia significa “ajustar su definición de éxito.” Dice que hace un beneficio, pero se negó a decir qué es, o si cada vez recuperado de su más de 250.000 dólares inversión inicial de franquicia. Increíblemente, insiste en que la empresa “razones para el estilo de vida, y no razones de beneficio”. ¿Eh? Probablemente, una cita de la empresa de franquicia de contratación los materiales. En el mundo de la franquicia de “éxito” y “rentabilidad” son términos muy subjetivos.

FRANQUICIA agentes que ENCONTRAR SU JUEGO PERFECTO?
¿La franquicia que están estudiando la posibilidad de tener su propia casa en el departamento de marketing, o se utilizan fuera de los corredores de franquicia? El uso de la franquicia de los corredores es una bandera roja definitiva. En primer lugar, indica la empresa de franquicia no es muy serio, que permite a la red de franquicia, o incluso peor, que están desesperados por vender franquicias. En segundo lugar, los agentes reciben una franquicia importante comisión hasta el 50% o más de la cuota de franquicia se está pagando la empresa de franquicia. Franquicia Broker realidades: (1) Su servicio no es “libre” a pesar de estas y otras tergiversaciones. Es realmente el sentido común – ¿cómo puede alguien ofrecer una “libre” de servicio y sobrevivir en el negocio? Lamentablemente, el sentido común, parte del cerebro tiende a corto circuito, cuando la franquicia de lavado de cerebro, comienza el proceso. La simple verdad es que si usted compra una de las franquicias que están vendiendo, el dinero va a parar a la empresa de franquicia, a continuación, en el corredor de bolsillo. Si alguien alguna vez calculada la cantidad de tiempo que dedican a recoger los $ 15.000 o $ 20.000 de comisión, es probablemente mucho más de lo que gana un cirujano cerebral. (2) Franquicia corredores definitivamente NO tienen sus mejores intereses en mente. Que hacer o decir lo que tienen que con el fin de cerrar un trato y se ganan la comisión.

Muchos afirman que los agentes de franquicia le ayudará a encontrar una empresa que franquicia es la opción perfecta para usted. Al principio suena bien. Hay algunas pruebas de personalidad y el examen de sus finanzas personales. Al final del día, resulta que sólo representan (y dirigirlo hacia) un puñado de pequeñas empresas de franquicia nunca has oído hablar de antes. Un análisis detallado revela a menudo estos productos altamente touted franquicias mediocres o incluso por debajo del salario mínimo, los resultados financieros. Sin embargo, los corredores de franquicia no mencionan esto, y las personas siguen dependiendo de sus recomendaciones, en la creencia de que el corredor representa. Nada más lejos de la verdad.

Además, muchos agentes se llaman a sí mismos franquicia franquicia consultores. A franchise consultant is usually an independent adviser who offers advice to others (usually franchise companies or firms that want to franchise their business) for a fee. This makes their advice more impartial in theory as long as they are not compensated by third parties. Because they are not legally required to disclose actual or potential conflicts of interest, it’s important ask questions. For example, if you’re using a franchise consultant who is recommending the “best franchises,” are they paid anything by the companies on their list? This could be a commission, kick-back or consulting fee. As mentioned, many franchise brokers call themselves “franchise consultants” to hide their true identity. So, make sure if you’re dealing with a franchise consultant, he or she is not really just a franchise broker in disguise.

FRANCHISE DISCLOSURE LAWS
The franchise disclosure laws, while requiring franchise companies to give you certain, limited information, don’t come close to protecting your interests. For example, as discussed above, Item 7 of the Franchise Offering Circular only requires an estimate of additional funds for 90 days as part of the investment information. But economic reality is you need to know the additional funds you’ll need to reach the break-even point, which can be years away, or your entire “initial” investment will go down the drain. You’d think this type of information would be required by franchise disclosure laws, but it’s not.

FRANCHISE REGISTRATION LAWS
Don’t ever assume that because a company has registered its Franchise Offering Circular in your state, someone at the state has approved or reviewed the document in your favor. Franchise registration is obtained by simply forwarding documents and paying a filing fee – period. In most cases, franchise offering circulars are given an extremely limited review to ensure state-specific disclaimers are present.

I remember filing a registration application for a new franchise company in a state with a reputation for being one of the “toughest” franchise registration law states in the country. After the three-week review period set forth in the statute had gone by, and not hearing anything, I called the examiner assigned to the application. After looking through his files, he finally found my client’s offering circular and application. He apologized for entirely misplacing the file and promised to immediately review the application and call me back. Ten minutes later, he called to say he’d finished and was making the registration effective that day. Ten minutes of review and the franchise company was given the state’s green light. This is not an isolated case – it happens all the time.

WHAT STANDARDS MUST A FRANCHISE COMPANY MEET TO SELL FRANCHISES; ARE THERE ANY REQUIREMENTS TO FRANCHISE A BUSINESS?
Incredibly, the answer is – none. There are no minimum standards or requirements to franchise a business except preparing a Franchise Offering Circular. It’s yet another bizarre reality in the world of franchising.

You and I could have no background in any business, form a new corporation or LLC, capitalize it with only $1, put together a Franchise Disclosure Document and file it with any franchise registration state. While the offering may be subject to an impound or escrow requirement because of the low capitalization ($1), we’d still get “registered” and be able to sell as many franchisees as we want.

In these 14 franchise registration states, we may not be able to receive any money until each franchise actually opened, but simply posting a bond would alleviate this difficulty in the franchise registration states. And in the vast majority of states there are no franchise registration laws, so we’d be able to sell franchises and collect fees with impunity once we compiled our Franchise Offering Circular. The federal FTC Franchise Rule doesn’t protect against this risk either – it only requires disclosure (i.e. provide a Franchise Disclosure Document) and has no registration component or minimum standards for franchise companies.

Basic investor protections and requirements found in both federal and state securities laws for over 50 years were never carried over to franchise investments. While most non-blue chip franchise companies could never even qualify to sell you a single share of stock in their company, they are entirely free to collect unlimited franchise fees, ongoing royalties, equipment and other purchases, as well as cause you to incur financial obligations totaling hundreds of thousands of dollars, or even millions in some cases. This isn’t information you’re likely to find in the glowing articles about franchising and franchise companies prevalent in the media.

CLOSING REMARKS
Remember, you are the only guardian when it comes to your franchise investment. It’s definitely an environment where the phrase “Buyer Beware” applies. So, before you sign on the line and make what will undoubtedly be the most serious financial and emotional commitment of your life, get all the facts and figures.

One couple I counseled after-the-fact, invested $2 million in a new franchise company. The contract they signed gave them no right to terminate, no matter what the franchise company did or didn’t do. Of course, the contract gave the franchise company unlimited termination ability, a right it had exercised. The franchise company’s management team had no one with experience in running a franchise company. Incredibly, the couple had not spent a dime on legal or business advice before investing $2 million. The once friendly franchise company had transformed into a formidable foe and was poised to take over their franchise. Sadly, this happens too frequently in franchise investments. Decisions are made on fuzzy feelings and emotionalism. In an effort to save a couple thousand dollars, franchise investors risk homes, retirement savings, everything they have. Then they scratch their heads in amazement later on after inevitable and often horrific problems develop, wondering how they could have been so nearsighted.

Another indispensable level of inquiry is whether you’re getting true franchise value and whether you’d be better off doing the business on your own. In the overwhelming majority of franchises touted by unknown companies, franchise value isn’t there and doing the same thing independently makes better economic sense and actually decreases the risk of failure.

Finally, and this applies to franchise investments as well as investing in any business venture, develop a plan to succeed but also plan a franchise exit strategy that minimizes financial risk in case things don’t work out. Both plans need to be thought through before the investment is made. Don’t wait until problems develop to start thinking about a franchise exit strategy – by then it’s usually too little, too late.