How to Buy a Franchise Business (Part 2)

Part 2: Analyzing the Franchise Disclosure Document

Step 1: Contact the franchisor. You need to thoroughly investigate the franchise. By law, a franchise must give you a Franchise Disclosure Document (FDD) at least 14 days before you sign a contract or spend any money on the franchise.
•    The FDD contains extensive information which you must analyze. Accordingly, you should try to get it more than 14 days before you sign a contract. In fact, you should ask for it upfront when you first call.
•    Some franchisors might not want to hand over the FDD until you submit an application or attend a discovery day. You should always proceed with caution if a franchisor hesitates to share their FDD.

Step 2: Complete a profile form. Nowadays, many franchisors will request that you provide some information about yourself so that they can judge whether they want to proceed with you. You may be asked to complete a profile form. You won’t receive the FDD until the franchisor decides you are a good candidate.

Step 3: Read about the business background. The first two items on the FDD will contain information about the franchisor’s background and the business background of the executives. Look for the following:
•    How established is the franchise? And how much business experience do the managers have?
•    Is it a new franchise? If you’ve never heard of it before, then pay close attention to the experience of the management team.

Step 4: Look at the franchise’s litigation history. The FDD should also identify any lawsuits the franchisor has been party to, as well as its bankruptcy history. You should show this information to your lawyer.
•    A franchisor that has been sued numerous times might not live up to its obligations under the franchise agreement and other contracts.
•    You also should be told whether management has ever been sued, either criminally or in civil court. If management has been convicted of fraud, for example, then they probably are not trustworthy.

Step 5: Analyze the costs of running the franchise. The FDD should also provide detailed information on the costs of starting and running the franchise. Pay close attention to these costs and ask about any costs that aren’t listed:
•    operating or business licenses
•    deposits
•    franchise fees
•    cost of inventory, signs, and equipment
•    leases
•    business insurance
•    trainings
•    employee salaries

Step 6: Note restrictions on how you run the business. Franchises allow you to use well-known trademarks and proven business methods—which is great. However, they may also limit your ability to run your business—which might not be so great. Franchisors can limit the following, which you should carefully consider before signing up:
•    limit the suppliers you can do business with
•    limit who you can services to and where you can sell
•    define the scope of your sales territory
•    prohibit you from selling goods through the Internet outside your territory

Step 7: Learn about the training available. The FDD should also explain the training and advertising that the franchise offers. The FDD might not provide comprehensive information, so be sure to ask questions of local franchisees or of the franchisor.
•    Franchisees typically must contribute a percentage of their sales to national and regional advertising campaigns. You will want to see how much you must contribute and whether you have any say in the advertising.
•    The FDD should explain the cost of training new employees and whether training is ongoing.

Step 8: Identify how you can renew or terminate the franchise. The FDD should also explain renewal terms and what you must do to qualify for renewal. The FDD should also explain your obligations after termination. For example, you might have to sign a non-compete clause, in which you agree not to work for a competitor for a certain amount of time.
•    The FDD should also state whether the franchisor allows franchisees to transfer the franchise to a different owner. Some franchisors might require that you give the franchisor right of first refusal.

Step 9: Study the financial information. The FDD contains a wealth of financial information which you must closely study. For example, the FDD should contain the following information:
•    Rates of closure and turnover. If many outlets in your area of being sold or closing, then you might consider that a sign that you shouldn’t open a franchise.
•    A list of franchisees who have left the business.
•    The franchisor’s three most recent audited financial statements.
•    Information about potential income and sales. This information is not required as part of the FDD, but if they provide it, they must have a reasonable basis for their predictions.

Step 10: Get professional help. As you read the FDD, you may not understand some of the information. You should schedule appointments with either a lawyer or an accountant, who can help you review the document.
•    To find a lawyer, you should contact your local or state bar association and ask for a referral. Request a referral to someone who specializes in franchises.
•    You can get referrals to a certified public accountant by contacting your state’s Society of Certified Public Accountants or by asking another business owner for referrals.

Step 11: Trust the FDD and not oral promises. A legitimate franchisor should never tell you something that can’t be supported by the FDD. If they paint a rosy picture of easy profits and minimal risk, then you should be skeptical.
•    Double check anything the franchisor says against the information provided in the FDD. If there is a mismatch, then ask the franchisor to provide supporting documentation.
•    Also be sure to get oral promises in writing.

(To be continued)

Source: https://www.wikihow.com/Buy-a-Franchise-Business