I represent both franchisors and franchisees across Virginia and assist my clients with setting up franchises, reviewing and negotiating franchise agreements, and explaining the pro's and con's of entering into a franchise relationship. Investing in a franchise can be a great investment. However, before jumping into a franchise, review my...
Top 10 Checklist for Evaluating a Franchise
1. Check the FDD – Franchisors are required by federal law and Virginia law to give you a copy of their Franchise Disclosure Document ("FDD") at least 14 business days before you pay any money or sign a franchise agreement. The FDD contains important required disclosures that will help you evaluate the franchise.
2. Check The Franchise Agreement – the franchise agreement is the contract between the franchisor and franchisee and controls the relationship. The franchise agreement should match the disclosures made in the FDD. Read it carefully to be sure there are no surprises.
3. Check With The State – check the status of the franchisor with the Virginia State Corporation Commission. In Virginia (and 14 other states around the country) franchisors must first register and be approved before selling franchises within the state. If a franchisor is offering franchises for sale in Virginia without registering, they're violating the law.
4. Check The Financials - The FDD should contain three years worth of the franchisor's audited financial statements. Review the financials carefully and share them with your CPA. If the franchisor is in poor financial condition then think twice before proceeding. The franchisor may not have the resources to support you properly.
5. Check For Past Troubles - Item 3 of the FDD should contain the 10-year history of lawsuits against the company. A history of litigation may mean that franchisees before you are not doing well and are dissatisfied with the franchisor. Try to determine the common theme of the cases to determine why the franchisor is in court.
6. Check The Number Of Dropouts – Item 20 of the FDD contains information regarding the number of franchisees that have left the franchise in the past three years. If the number of dropouts is high, this is a warning sign that franchisees are dissatisfied with their investment.
7. Check The Earnings Claims – Has the franchisor told you how much money you can make with the franchise? If they have, check Item 19 in the FDD. A franchisor is legally allowed to provide potential franchisees with an earnings projection, pro formas or statements about how its franchisees have performed but such information must also be included in writing in the FDD. If the information isn't in the FDD, the company must decline to discuss potential earnings, revenues, or profits. If no performance information is given (only about 25% of franchisors provide earnings claims), it may be because the true picture isn't positive.
8. Check The Economics – if the franchise you're considering requires you to sell the franchisor's products, make sure the economics make the offer viable. Can you sell at a profit and still be competitive in your market? Ask other franchisees whether the pricing has worked for them in practice.
9. Check With Other Franchisees – the FDD should contain the names and contact information for franchisees. Call as many of these folks as possible and ask them questions regarding their experiences with the franchisor. Don't be shy about asking them about their financial performance - they are legally free to tell you and, most of the time, are happy to share.
10. Check Your Gut – after checking the items in 1-9 above, what does your gut tell you about this opportunity? Are you still excited about it? Or does your gut tell you that there may be problems. Always do thorough due diligence before entering into any agreement, but trust your gut, too.
I would be happy to help you evaluate a franchise to determine whether it's right for you. I am experienced in FDD's, franchise agreements, and franchise business models and can help you make the right decision. I offer a flat fee service that includes a detailed review of the FDD and franchise agreement and a written evaulation of the terms, areas for negotiation, and advice on how to approach the franchisor with requests for changes. Call me today at 804-290-7990 to discuss this in more detail or send an email to [email protected] .