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Five Things to Know About Franchises

Mya Frazier, Bankrate.com

Laid-off professionals with severance packages and a lifetime of savings often view a franchise deal as a quick exit from unemployment and a steppingstone to financial and personal independence.

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Sadly, it doesn't always end that way. Many would-be entrepreneurs have ended up bankrupt and out hundreds of thousands of dollars after falling for dubious franchise concepts hawked by pushy salespeople.

If you're thinking of opening a franchise, here's what to know about your legal rights, the franchise marketplace and the research you must do before signing a contract and handing over that nest egg.

Seek independent advice
If you do a Web search for franchise consultant, you'll find thousands of sites created by self-declared "experts." Fees can reach $300 an hour, and a well-known industry secret is that many of these self-proclaimed consultants aren't exactly independent. It's understood that many of them push would-be entrepreneurs into specific franchise brands and concepts for financial gain.

"You are better off going to people that do not have an agenda," says retired franchise owner Betty Otte, who often counsels would-be franchise owners for free as district director of the Santa Ana, Calif.-based Orange County office of SCORE, the nonprofit group that offers free business counseling at 370 chapters in the United States.

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Her consistent word of advice: Read, reread and then read again the Uniform Franchise Offering Circular, or UFOC. The document, required by the Federal Trade Commission, defines the relationship between the franchiser and franchisee. It's often long, arduous to complete and chock full of confusing legalese. Unless you're an out-of-work attorney, don't review it alone. Seek unbiased help from an attorney and a business counselor.

"I always have people read it and come with questions," says Otte. "It usually runs about 23 different components. It's like a lease. It's a very binding document, and it's very hard to dig your way through it."

Otte also recommends that would-be franchisees not rely solely on the franchiser for business planning. When Otte started as a franchise owner in 1980, opening a NutriSystem location in Orange County, she created and constantly updated an independent business plan.

"We looked at it as a business," Otte says. "Yes, it was true that we had the support of the franchiser. Yes, it was true we had a community of other franchisees we could relate to. But we still had our own business plan and our business goals. We operated as a freestanding business in parallel to it being a franchise."

Don't be afraid to walk away
Howard Sherman has come close not once, but twice, to signing on the dotted line, handing over a big check and entering the ranks of America's franchise owners. He even spent a week in Las Vegas visiting the store operations of a used baby-clothing franchise chain.

Then he walked away.

Research, research, and research some more...Read more