10 danger signs to look for when buying a franchise: no-risk guarantees, customers' complaints and tough termination terms are just a few things to watch out for - includes trade association resources - Cover Story
Black Enterprise, Sept, 1994 by Joan Delaney
SHOPPING FOR A FRANCHISE can be like walking into a lion's den: There are lots of hungry franchisors looking to eat you up and spit you out. Although many franchisors practice the highest ethics, others are unscrupulous and will use shady tactics to get you to buy.
There are an estimated 550,000 franchised businesses operating in the United States. The number is growing by about 6% a year, according to the International Franchise Association in Washington, D.C. In retailing, franchised businesses account for more than 40% of the total sales volume, and this figure is expected to increase.
However, potential franchisees should not be baited by the promise of quick profits, low initial investment and freedom to be their own boss. When evaluating a franchise, too many entrepreneurs disregard red flags and fail to completely examine the franchisor or the contract, according to Robert L. Purvin Jr., a franchise attorney and author of The Franchise Fraud (John Wiley, 1994, $27.95).
Many people think the Uniform Franchise Offering Circular, a disclosure document required by law, is a stamp of approval by the government. Actually, the circular provides a jumping off place for you to begin your own investigation.
Start by talking to other franchisees. "Potential franchisees are foolish if they don't take advantage of this valuable resource," says Lewis G. Rudnick, a partner in Rudnick & Wolfe, a Chicago law firm specializing in franchising. The Federal Trade Commission requires franchisors to list the names of at least 10 franchisees operating in the applicant's vicinity. In addition, you should poll franchisees in various parts of the country to get a more complete picture. Then, you need to scrutinize the circular to separate the wheat from the chaff. Here are 10 franchise danger signs. If you see one or more of them, run.