So you want to buy a franchise? Sounds like a great idea. After all, buying a proven business formula allows you to be steps ahead of the competition and learn from the success of others. It makes absolute sense on many levels, and thus explains the proliferation of franchising and its thriving success rate.
The challenge becomes when you start researching the myriad of possibilities. Never mind identifying one that will best fit your needs, talents, and lifestyle, there is the question of ethics and sound business practice on the part of the franchisor. How can you rest assured that the franchise system of interest to you is one that practices ethical business standards?
As a relatively new franchisor myself, I can share with you certain things learned upon my journey. Here are a few tips to guide you along your way
Trade Associations – A sign of credibility is when a franchisor is a member of a franchise trade association that screens its members for ethical business practices. An example in Canada is the Canadian Franchise Association (CFA); in the U.S., the International Franchise Association (IFA). Both associations review the franchisorís legal documents to ensure they conform to appropriate legal and ethical standards. The CFA even goes so far as to email all existing CFA members with the names of those franchisors looking to gain membership. If any CFA member has information to report on one of the prospects ñ good or bad ñ this is taken into account.
Legal Documents – There are stringent guidelines as to the details that must be included in the franchisorís franchise agreement and other legal documents to be provided to the franchisee. In Canada, all prospective candidates in Alberta, Ontario and some Maritime provinces must receive, in addition to the franchise agreement, a disclosure document detailing the franchisorís history, including any litigation, financials, and location closings. The requirements in the U.S. UFOC (Uniform Franchise Offering Circular) are even more precise, requiring a thorough account of every detail of the franchise agreement. Due to the legal intricacy of the documents, hiring legal counsel is advised.
Wait and Review Period – With the above in mind, you should always be advised by the franchisor of the wait time ñ in the above referenced provinces in Canada and in all U.S. states ñ between receiving the legal documents and signing any binding agreement or making any payment to secure the franchise rights. In Canada, this is generally 14 days. In the U.S., it is 10 business days (or 14 calendar days in Illinois). If a franchisor pushes you to sign or make payment before this time has elapsed, illegal and unethical practices are present.
Earnings Claims – Unless the franchisor specifically provides earnings claims in its UFOC or franchise agreement, no earnings claims can be made alluding to sales, income, or earnings potential for the prospective franchisee. Promises of success and income guarantees are thus often unethical and illegal.
Contacting Existing Franchisees – The above being said, you may contact existing franchisees for their sales perspectives. They may share this information with you, at their discretion. As a rule, it is always a good idea to contact existing franchisees. While each will have his/her own life circumstance and income goal in mind, they can give you an idea as to the honestly and integrity of the franchisor and its franchise system.
Resolving Disputes – Disputes inevitably come up between franchisee and franchisor. As long as the franchisor works with the franchisee or prospective franchisee to resolve a dispute, ethical standards are generally being practiced. Having your questions or concerns go unanswered or be ignored is another matter. Open communication between both parties is key.
By no means does the above cover all elements in determining the legitimacy and legality of any franchise system. Franchise laws change frequently and the franchisor must adapt to these new requirements.
Nevertheless, trust your instinct, hire legal counsel to review the franchise agreements, and get as much information as you can. The franchisor should respond to your queries in a timely fashion and with detailed responses. You should identify with the product, the branding, and the companyís philosophy and goals. In essence, the franchise system should feel comfortable to you, like your own. If ethical franchise practices have been put in place and your needs have been addressed, this should be the case.