Learning about franchise documents

When you become interested enough in a franchise opportunity to start gathering information and beginning discussions with a prospective franchisor, you will need to be more familiar with two important documents - the offering circular and the franchise agreement or contract. By learning more about both of these documents and the details they require, you will be better prepared to investigate potential franchise opportunities.Here are some tips and strategies on what is involved with each

The Uniform franchise offering circular

The Federal Trade Commission implemented a 1978 federal rule by amendment that required franchisors to present would be franchisees with a disclosure statement, also known as a uniform offering circular, which contains certain information regarding a franchise.

This existing FTC rule was substantially modified the 1995 rule. Therefore, franchisors in all 50 states starting in July 2008 are required to provide prospective franchisees with a revised Uniform Franchise Offering Circular (UFOC), which will be titled "Franchise Disclosure Document".

Specifically, the franchisor, prior ot July 2008, must provide you with a Uniform Franchise Offering Circular at the earliest of three times.

• At the first face-to-face personal meeting between you and the franchisor or at the time for making disclosures regarding the terms and conditions of the sale of the franchise;
• 10 business days before you make any payment to the franchisor; or
• 10 days before you sign any contract committing you to buy the franchise or any other agreement imposing a binding legal obligation on you.
• The new amended rule changes the time from 10 business days to 14 calendar days before a prospective franchise may sign any binding agreement or pay any consideration for the franchise after the mandatory July 1, 2008 effective date.

In addition, the pre-july 1, 2008 FTC amended rule requires all franchisors to furnish to furnish you with completed copies of the documents to be executed at least five days before you sign on the dotted line. The amended rule changed the time required by the FTC rule from five business days to seven calendar days but only if the franchisor unilaterally makes changes. Also, the amended Rule allows for electronic delivery of the UFOC and electronic signatures.

Examine the uniform Franchise offering circular very carefully, even if you have gleaned information on your own regarding a particular franchisor and his or her franchise offering.

After receiving an offering circular, try to personally do a field investigation of all the franchises offered in the field of your choice, and compare franchisors doing business in the same area. To do a field investigation, check with current franchisees.

Ask about their experiences with their franchisor and whether the franchisor has carried out the representations made in the circular and the franchise agreement.
Find out whether or not the franchisor keeps his or her promises.
Try to discern the attitude of the current franchisees regarding the major people in the franchisor's hierarchy of personal.
Fond out whether the franchisees feel that their franchise opening costs were more than what the franchisor estimated they would be.
Determine if the franchisor provided the franchisees with adequate training or left them on their own.

Remember: Competitors of a franchisor will generally be more than happy to give you all the "dirt" about that franchisor. The same is true of current franchisees. If they have a gripe against their franchisor, they will be the first to tell you in no uncertain terms.

Checklist for franchise or small business suitability #2

To help determine how fit you are for buying and running a franchise operation or small business, use the following checklist for evaluating your suitablity as a franchise or small business buyer:

Personal questions

• Are you and your spouse physically able to handle the emotional and physical strain involved in operating a franchise or small business, caused by long hours and tedious administrative chores?
• Will your family members, particularly small children, suffer from your absence for several years while you build up your business?
• Are you prepared to give up some independence of action in exchange for the advantages the franchise offers you?
• Have you really examined the type of franchise or business you desire and truthfully concluded that you would enjoy running it for several years or until retirement?
• Have you and your spouse had recent physicals?
• Is the present state of your health and that of your spouse good?
• Do you and your spouse enjoy working with others?
• Do you have the ability and experience to work smoothly and profitably with your franchisor, your employees and your customers?
• Have you asked your friends and relatives for their candid opinions as to your emotional, mental and physical suitability to running your own business?
• Do you have a capable, willing heir to take over the business if you become disabled?
• If the franchise or new business is not near your present home, do you realize that it would not be beneficial to sell your home and buy one closer until the new venture is successful?

Business questions

• Do you and your spouse have past experience in business that will qualify you for the particular type of franchise or business you desire?
• Is it possible for either you or your spouse to become employed in the type of business you seek to buy before any purchase?
• Have you conducted independent research on the industry you are contemplating entering?
• If you have made your choice of franchises, have you researched the background and experience of your prospective franchisor?
• Have you determined whether the product or service you propose to sell has a market in your prospective territory at the prices you will have to charge?
• What will the market for your product or service be like five years from now?
• What competition exists in your prospective territory already?
• From franchise businesses?
• From non-franchise businesses?
  

Checklist for franchise or small business suitability #1

To help determine how fit you are for buying and running a franchise operation or small business, use the following checklist for evaluating your suitablity as a franchise or small business buyer:

Financial questions

• Have you and your spouse and knowledgeable family members discussed the idea of going into business for yourselves?
• Are you in complete agreement?
• Do you have the financial resources required to buy a franchise or small business? If not, where are you going to get the capital?
• Are you and your spouse ready to make the necessary sacrifices in the way of money and time in order to operate a franchise or small business?
• Will the possible loss of company benefits, including retirement plans, be outweighed by the potential monetary and self-pride rewards that would come from owning your own business?
• Have you made a thorough written balance sheet of your assets and liabilities, as well as liquid cash resources?
• Will your savings provide you with a cushion for at least one year after you have paid for the franchise or small business, allowing a one-year period of time to break even?
• Do you have additional sources of financing, including friends or relatives who might be able to loan you money in the event that your initial financing proves inadequate?
• Do you realize that most new businesses, including franchises, generally do not break even for at least one year after opening?
• Will one of you remain employed at your current occupation while the franchise or small business is in its initial, pre-profit stage?

Other considerations

• Do you know an experienced, business-oriented franchise attorney who can evaluate the franchise contract you are considering?
• Do you know an experienced, business-minded accountant?
• Have you prepared a business plan for the franchise or business of your choice?
  

Are you franchise material?

You need to consider if you are cut out to be a franchise owner and operator. To do this, you need to take a hard look at yourself and evaluate how you would handle the responsibilities and operations of a franchise. Obviously, you want to do this before you make what could be the biggest investment of your life. Check it out first with an experienced franchise attorney before you sign or pay any money.

Most people have the notion that in franchising a lot of money can be made with a minimum of effort. This is a serious misconception. The franchisee who works the hardest profits the most from a franchise business. Initially atleast, you must be able to make sacrifices. You must lay a strong foundation even for the most successful franchise operation. Be prepared to put in long hours of hard work and, above all, to be disappointed by your employees to a certain extent. The extent of this disappointment is directly related to how good you are at selecting and supervising people. The next consideration is how well you are organized. Last, but not least, an important factor is the state of your health.

One thing is certain: if the franchisor is merely interested in your money and does not evaluate you under certain standard criteria geared to determine your potential to succeed, there is something wrong with the franchisor. However, before you even see a franchisor, evaluate yourself. Ask yourself questions as:

• Will your franchise be taking a considerable amount of your time away from your family? If so, how do you feel about that?
• Is your family enthused about the franchise? Will you enjoy working with them if they will be employees?
• Do you enjoy working with others?
• Do you have the background or character traits necessary to succeed in owning a business?
• Do you have the necessary capital resources? Can you make the financial sacrifices?
• Are you emotionally prepared for working long, hard hours?

Don't be afraid to ask friends and acquaintances for their opinions on your abilities along these lines. Don't rely on just one opinion; get at least several.

Franchising and the Law

Part of the flurry of new regulations and legislation that were implemented to help protect franchisees included an FTC rule, applicable before 1-Jan-1995, that required a written disclosure statement, referred to as an FTC offering circular. The FTC offering circular specified areas of information to be presented to prospective franchisees at certain points in time. This FTC rule regarding offering circulars applied to those states that had not passed franchise acts. Fifteen states passed their own franchise acts that require registration, while the FTC, which governs all the states, doesnot require registration.

Under the franchise laws currently effective, the FTC and all 50 states use the same uniform Franchise Offering Circular, although the registration states retain the right to impose stricter provisions if they so desire, including registration. In all instances, the federal and state statutes do not provide a means of deciding whether or not a franchise is of any value or even whether or not the information submitted by the franchisor is true or not. The statutes merely force the franchisor to make certain representations and reveal certain information that, if untrue, would subject the franchisor to civil and criminal lawsuits.

The bottom line is that no legislation will ever eliminate crime and no legislation will ever eliminate the naivete of some potential business owners who are obsessed with seeing only the good parts of a transaction and none of the bad. As a prospective franchisee, you must be aware of the con artists that are hard at work trying to present the best possible image of their particular opportunity and who call their business endeavors "partnerships" or "licenses."

This does not mean, however, that all partnerships or license agreements are franchises or fraudulent schemes. Because licensing and franchising have become almost synonymous, the con artists seem to consider arrangements called "partnerships" as convenient labels for circumventing the disclosure requirements of federal and state law. These type of partnerships usually offer the use of the same business name and style, but the seller is a partner whose interest is eventually purchased by the business-seeking entrepreneur. The major drawback to this type of arrangement is that the selling partner does not have the capital and does not with to reveal information about himself or herself. This would not be the case if the seller were a franchisor. In addition, before the new business-seeking entrepreneur purchases the partnership, the business is usually subject to the control of the selling "partner."

In conclusion, beware of any offered entity that supposedly gives you a going business under a trade name and has you start out as a partner and end up eventually as a sole owner, along with other individuals who also purchased a partnership interest in other areas and became owners, using the same name as yours.

Buyer beware

More and more buyers are seeking franchises from relatively unknown franchisors with little-known brand names and service marks. At the same time, an increasing number of people, particularly those who have not been in business before, are also interested in purchasing small businesses from independent business owners operating in a geographically limited neighborhood area. This scenario usually takes the form of older sellers who purportedly wish to dispose of their business as they reach retirement age. Since spending your savings on a business is one of the most important decisions of your life, if not the most important decision, always heed the classic advice, "Buyer beware."

In the late 1950s and 1960s, all kind of charlatans jumped on the bandwagon and franchised nearly everything imaginable, on a global scale. A buyer didn't always know what he or she was getting into. Typical of our society, help eventually came from legislative enactments that swung the pendulum the other way, at least as far as paperwork is concerned. As a result, franchising today is a much more exacting and time-consuming process because of required procedures and restrictions. But all this activity has resulted in more protection for the franchise buyer.

Why buy a franchise?

With so many options available and all the potential pitfalls possible in buying a business or franchise, you may be wondering why you should invest your time and money in a franchise opportunity. To help you get an idea of some of the advantages you would enjoy as a franchisee, review the list below. As a franchisee, you will enjoy:

• Group advertising power
• Owning your own business and making day-to-day decisions yourself, guided by the franchisor's experience
• The ability to sell products and services to markets that cannot be serviced by company-owned outlets because of higher operational costs and lower motivation of employees in company-owned outlets
• The benefit of identification of service marks, trademarks, proprietary information, patents and designs
• Systematic training from experts
• A lower risk of failure and/or loss of investments that if you were to start your own business from scratch
• Being a part of an uniform operation, which means all franchises will share the same interior and exterior physical appearance, the same product, and the same service and product quality
• Assistance in financial and accounting matters from the franchisor, as well as ongoing support
• The enhancement of your management abilities and benefitting from an opportunity you could not have in most employment situations

In addition, you may wonder how to ensure that you make the best decision possible. Investing in your own business takes guts and the willingness to make important decisions. As a result, you will need to carefully research the statistics regarding new business start-ups versus the purchase of an existing business from a non-franchisor. Once you have done this, compare these statistics with research on franchised endeavors. What you find may be useful in helping you make a sound business decision and helping you understand why franchising may be more beneficial for you. Here are some helpful facts of franchising:

• The US Department of Commerce, in an early edition of Franchising in the Economy, cited statistics showing that franchising had increased phenomenally over the years and it was a significant part of the present US marketing system. Franchising offers tremendous opportunities to individuals and companies seeking wider distribution of their products and services. The US Department of Commerce also pointed out that retail sales from franchise establishments accounted for over one-third of all US retail sales.
• John Naisbitt, in the Naisbitt Group's The Future of Franchising: Looking 25 Years Ahead to the Year 2010 (1989), predicted that more than one-half of all retail sales would be made through franchise sales by the year 2010.
• Government research over the years has indicated that the success rate for franchise-owned endeavors is significantly better than the rate for non-franchise-owned small businesses.

In short, the good news is that franchising is a growing part of the national economy and presents a better chance for success to the new franchisee. The bad news is that not every franchise is a surefire way to multiply your savings and provide you with an enjoyable occupation.