Sebastien Page

Because investing in a franchise is a life-changing event, every prospective franchisee should thoroughly investigate a franchise opportunity before signing any sort of franchise agreement.

While there are multiple websites and books floating around that outline the steps that ought to be taken in the interests of due diligence, you should take a minute to review the “red flags” we’ve outlined below:

1) Is the franchise salesperson putting on the pressure? One of the traits of a good franchisor is that it wants to make sure there is a mutually good fit before “closing the sale.” Should you find yourself being pressured into making a decision but feel like you haven’t been given adequate time to think everything through, don’t sign an agreement. Frankly, the franchisor wouldn’t be hounding you like that if the franchise opportunity were, in fact, spectacular or if there were, in fact, a long line of potential franchisees. What’s more likely in a pressure situation is that the franchise opportunity is not that spectacular, their line is not that long, and, conversely, they need your money in order to make their payroll.

It takes immense discipline and fortitude to survive a franchisor’s bankruptcy. It’s a good idea to have a plan to minimize any potential losses in revenue and reputation, just in case such an unfortunate circumstance arises. When armed with a plan, you’re more likely to avoid disaster and consequently keep your business afloat.

The following are tips designed to help you get through franchisor bankruptcy:

– Heed warning signs: Hear a rumor? Investigate it. You do not want to find out the hard way – i.e., through a third party like a customer or the paper – that the franchisor is bankrupt, since doing so can compromise your rights and interests. If someone murmurs “bankruptcy,” be on the alert. The worst case scenario is that you determine that the rumor is no more than a rumor, and business resumes as usual. Some signs are very subtle, so pay attention. For example, if your franchisor is collecting advertising money from you but you don’t see any advertising happening, be on guard.

There are a number of ways you can find and purchase franchises. Keep in mind that due diligence is necessary, and anything that sounds too good to be true probably is.

The ways in which you can locate and purchase franchises include:

Directly Through the Franchisor: As a general rule, franchisors list information on their websites or will send you an information packet per request.

Internet: When it comes to online franchise directories, there are nearly too many to count. Many of these lead generation sites offer additional features, including advice on franchising, franchise law, and financing. Be aware, though, that, due to the sheer volume of available information, you may have difficulty deciding where to begin your search for the ideal franchise opportunity.

Your status as either a potential purchaser or merely a curious member of the public partially determines the amount and quality of information you’ll be able to discover about the financial performance of a specific franchise. Potential purchasers are able to find out about a franchise’s financial performance via the Federal Trade Commission’s (FTC) Franchise and Business Opportunity Rule. Under the Franchise and Business Opportunity Rule, franchisors are required to make a series of detailed disclosures to potential purchasers, either in the Uniform Franchise Offering Circular (UFOC) form or in the form provided by the rule.