23? That’s the number of items in the Franchise Disclosure Document — your golden ticket that franchise companies are required to provide their prospective franchisees.
Watch: How To Find A Franchise
The disclosure rules enforced by the Federal Trade Commission (FTC) give you the tools you need to choose a franchise. Once you learn to navigate this comprehensive document, you should be able to make a match that will allow you to succeed in your new business.
The trick is to figure out where to focus your energy. A franchise coach can help you understand the fine print. But as you begin to peruse these documents, we recommend you focus on the following items:
Item 1 – The Franchisor
The very first page gives you the business history of the franchisor, where it is incorporated, other names under which it has operated and a general description of the business.
Item 3 – Litigation
You’re not looking for a gotcha moment for a single lawsuit, but if you see a history of many lawsuits brought by franchisees, heed the warning, stop reading, and cross this franchise off your list.
Item 7 – Initial Investment
Don’t blink at the numbers. Without enough start-up capital, your business will likely flounder. You need enough money to run your business for a few months. You will see a list of costs including an initial fee, costs to improve the leased space, estimated wages, lease payments, cost to purchase furniture, fixtures, and a sign, architectural and engineering fees, initial investment in inventory, insurance, plus additional costs estimated by the franchisor.
Item 12 – Territory
Some franchises have what’s called a protected or exclusive territories. This is a promise that they will not allow another franchisee to operate within a specified distance of your location. Protected territories are not necessarily better, but you do want to understand the parameters.
Item 19 – Earnings Claim
Only about a third of all franchises make earnings claims. When making earnings claims, franchises are required to provide specific supporting materials, including exactly which outlets were included. Since earnings for individual franchises can vary substantially, we recommend you verify any numbers you see in this section with individual franchisees.
Item 20 – List of Franchise Outlets
Your most important section since this is where you will find the key that will help you open the door to a successful business future: the names, locations and phone numbers of all franchisees currently operating, as well as franchisees no longer operating. You should call as many as you can, both current and former franchisees, to learn about their businesses.
Has the franchisor’s support systems been helpful? How long did it take for them to become profitable? Are they satisfied with the franchise? Would they purchase this franchise again? For the former franchisee, what went wrong?
Item 21 — Financial Statements
Franchisors are required to include copies of their audited financial statements for the most recent three fiscal years to demonstrate the financial condition of the company.
When you enter a business, you rarely receive such a comprehensive road map to help you plot your way to success. It’s up to you to use this treasure trove of information and complete your due diligence so you can make the choice that makes your career.
Dan Citrenbaum is a franchise coach and consultant to entrepreneurs, who helps people achieve their dreams as small business owners. He has a proven track record helping people select and buy a franchise or existing business. Contact Dan at [email protected] or at (215) 367-5349 and view his company website at www.entrepreneuroption.com.
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