Q: I am hoping to buy a franchise. Is there anything I need to look for in the Franchise Disclosure Document (“FDD”)?
A: When you are examining the FDD, you should be aware of these five (5) red flags:
1. Weak franchisor financials: If the franchisor does not have a strong balance sheet and P & L, do not expct to have them as a franchisee.
2. Litigation: Is the franchisor litigious or prone to litigate its disagreements?
3. Existing franchisees are closing, transferring or otherwise exiting the system. If more than 5% of the chain’s franchisees are leaving the system annually, there could be a systemic problem causing franchisee failure.
4. The franchisor is selling franchises, but the franchisees do not open outlets in a timely fashion.
5. A requirement to pay a non-refundable fee prior to the franchise fee.
If you see one ore more of these red flags, it might be wise to pass on the opportunity.
Joel D. Rosen, April 2011
Q: I am considering buying a franchise. Where do I start?
A: If you are like me, the first place you look to research any topic is the Internet. If you are considering buying a franchise and search “buying a franchise,” there are countless sites you’ll discover. Be wary of most of them. They are trying to sell you something –either franchises or services related to franchisees — and most are not impartial. One site I recommend visiting is the U.S. Small Business Administration’s “Small Business Planner” for buying a franchise at www.sba.gov/small businessplanner/start/buyafranchise/index.html. The site contains some terrific free information, frequently asked questions, strategy tips and helpful guides to buying a franchise. And remember, never make a decision to acquire a franchise without first consulting a knowledgeable franchise attorney to review the proposed franchise documents.
Joel D. Rosen, February 2010