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DOs and DON’Ts for Prospective Franchisees

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For individuals and groups of partners or investors considering pursuing a franchise opportunity, there are several important steps to be taken and considerations to be had before committing to any particular franchise system. Back in December I wrote an article discussing qualitative and quantitative aspects of due diligence, and sources of information for prospective franchisees. This article discusses some basic “dos and don’ts” (with heavy emphasis on the “dos”) for prospective franchisees to consider when evaluating franchise opportunities.

Do: Consider Multiple Franchise Opportunities

Many times, prospective franchisees will mentally commit to one particular franchise opportunity before doing their research on the franchise system, and without meaningfully considering any other franchise opportunities. The reasons for this can range from hype about a “hot” concept or trendy product offering to hard sales tactics by brokers or internal sales personnel. As with any significant investment or business opportunity, prospective franchisees should at least consider some comparable franchise opportunities. This comparative analysis will shed light on unique aspects of different systems, expose departures from industry standards, and generally provide further insight for making an informed final decision about the franchise to be pursued.

Do: Speak with Current and Former Franchisees

When evaluating a potential franchise opportunity, current and former franchisees can provide valuable insight into several aspects of the franchisor’s system. From perceived brand value, to quality of operational standards and support, to financial data, these independent business owners will hold a wealth of information that can help inform a decision regarding a potential franchise investment. In addition, in certain, limited circumstances, one or more former franchisees may be able to tell you all you need to know to avoid a debacle of an investment.

Of course, new concepts and geographically-focused concepts may have no or only a limited number of franchisees. These opportunities should not simply be avoided wholesale; however, in these cases it will be particularly important to have candid and open discussions with the franchisor’s owners and representatives.

Do: Acknowledge and Understand the Role of Franchise Brokers and Internal Sales Personnel

This is not intended to detract from the role of and value of services provided by franchise brokers and internal sales staff, but, as in any situation, it is important to acknowledge and understand that these individuals—to varying degrees depending on reputation, experience and philosophy—are paid to sell prospects on the franchise offering. When working with a franchise broker, prospective franchisees should seek out information as to how many and which franchisors the broker works with, and how the broker is compensated by these franchisors. When working with internal sales staff, prospective franchisees should still seek access to operations personnel, and the sales staff should be knowledgeable about basic franchise disclosure regulations and the basic terms of the franchise agreement. In any case, the process should be reasonably transparent, and pushy sales tactics and signs or suggestions that information is being withheld should raise red flags.

Don’t: Rush Into a Franchise Without Performing the Necessary Due Diligence

As alluded to by the foregoing “dos,” the investigation, selection and pursuit of a franchise should involve an intensive process of acquiring and digesting pertinent information to allow for making an informed decision to move forward with the chosen franchise opportunity. Prospective franchisees should invest the time necessary to perform the requisite due diligence, and should work with experienced advisors to make sure that their interests are fully weighed and adequately represented with respect to the ensuing franchise relationship.

Jeff Fabian is the owner of Fabian, LLC, a boutique intellectual property and business law firm serving new and established franchisors and prospective franchisees. Contact the firm directly at 410.908.0883 or jeff@fabianlegal.com. You can also follow Jeff on Twitter @jsfabian.

This article is provided for informational purposes only, and does not constitute legal advice. Always consult an attorney before taking any action that may affect your legal rights or liabilities.

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Jesse: Ladies and gentlemen, thank you for standing by, and welcome to the FranchiseHelp, Inc. Understanding the FDD for Franchisors Conference Call. During the participation, all participants will be in a listen only mode. Afterwards, we will conduct a question and answer session. If you have a question, please press the 1 followed by the 4 on your telephone. Your line will be briefly accessed from the conference to obtain the information. If at any time during the conference you need to reach an operator, please press star zero. As a reminder, this conference is being recorded Wednesday, May 7th, 2008.

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