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10 Common Mistakes of Prospective Franchisees

Excerpted From
The Franchise Redbook: Easy-To-Use Facts and Figures
by Roger C. Rule

To insure your success, you will want to avoid as many mistakes as possible. Here are the ten most common mistakes made by prospective franchisees in their pursuit of buying a franchise.

4. Not verifying oral representations of the franchisor.

You can avoid this mistake if you take the proper precautions. You may want to tape record all your meetings with the franchisor. If you ask permission to do so, it is generally admissible in court if the need arises later. It also lets the company representatives know that you are tracking their words. You can do this politely, but if you prefer, take compendious notes of all your meetings. Later, review and summarize the details of your discussion, noting any items requiring clarification. Send a registered letter to the franchisor and a copy to the representatives memorializing your notes with a request for their response to any items you want clarified. Do not leave anything unresolved.

Due diligence also includes verification. If there have been any oral representations, of which you are uncertain, try to verify these with previous and current franchisees as well as through additional meetings with the franchisor. As stated in item 2 above, get anything orally promised in writing if it differs from other literature and the disclosure document.

5. Not contacting enough current franchisees.

The section of the disclosure information on “Past, Current and Future Franchisees” is a valuable starting point for locating franchisees. It is imperativeIt is of paramount importance to contact existing franchisees to discuss any concerns you may have with existing franchisees. If the franchisor gives you a tour, which includes two or three franchisees, get back to them later and ask any questions that could have been confrontational or embarrassing if asked in front of the franchisor. Another important factor here is to find out whether the franchisor has introduced you to specific franchisees compensated for their help to solicit new franchisees. Ask them directly, then follow up with letter stating their answers to your questions. It is surprising how an inaccurate response might change once it is in writing.

Other than the franchisees introduced to you by the franchisor, to get a true picture, you can survey others listed in the disclosure document not versed in soliciting prospective franchisees. Find out from them if the franchisor has a reputation for honesty and fair dealing. It is of paramount importance to contact existing franchisees of the franchisor to verify their experience of the accuracy of previous disclosure documents. Also, ask their opinions of the accuracy and completeness of the current one. Further, you can solicit their help in verifying any other information not provided in the disclosure document.

When interviewing other franchisees, try to cover a large cross section of franchisees. Seek answers from those that:

Are in different locations,

Have one franchise,

Have multiple franchises,

Have been in business a long time,

Are still new,

Are successful, and

Are not doing so well.

For the latter, try to determine the reasons. Specifically, ask the franchisees if they feel that the franchisor exercises too much control, or not enough. Is the franchisor always willing to help? Has the franchisor held up its end of the obligations regarding ongoing support assistance and training?

Information from franchisees about their first year in business and their experience with the franchisor can be extremely enlightening. Under the FTC requirement, while the offering circular must disclose a list of existing franchisees, this record does not have to be complete. If you find the list provided to you is incomplete, ask the franchisor for a complete registry.

6. Not confirming the reasons for failed franchises.

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