The purchase of a franchise may be one of the largest investments in your life. The decision to buy a franchise should be based on sound business principles, not emotional motivations. A prospective buyer needs to consider a variety of important issues at the time of purchase, and the more "due diligence" you can bring to a deal, the lower your chances of failure. Attending a franchise show is a good way to begin the process of determining if franchising is right for you and which industry and company (franchisor) in that industry is your likely candidate. You will receive information from many companies and, after the show, follow-up calls from salespeople. How do you go about making an informed investment decision?

    Franchising is not for everyone. You need to be able to follow the system prescribed by the franchisor. If you are a very independent, entrepreneurial person, franchising may not be right for you. On the opposite end of the spectrum, you must possess good management, organizational and leadership skills to run the business.

    Is the industry you are planning to enter on its way up? Stagnant? On its way down? Analyze what effect technology, changing lifestyles and changing demographics may have on the industry.

    Compare the various offerings in an industry. Once you have targeted an industry, look at all of the various offerings in the industry to see which opportunity will survive in the long run, if a franchise is available in your locality, the cost and the amount of service and support given by the franchisor.

    The Federal Trade Commission's Franchise Rule requires a franchisor to provide you with a disclosure document (usually a Franchise Offering Circular, or "FOC") which gives detailed information about the franchise offering and includes a copy of all documents you will be required to sign, including the franchise agreement. The law requires that you receive the FOC on or before "a first personal meeting" with a representative of the franchisor. When you receive the FOC, you will be asked to acknowledge receipt by signing and returning to the franchisor an Acknowledgment of Receipt (usually ITEM 23 of the FOC). The franchisor cannot require you pay any money (even in escrow or as a refundable deposit) or sign any agreement until after you have had the FOC for at least 10 business days. In addition, you must have the completed franchise agreement with all the material terms filled in at least 5 business days before you are required to sign it or give the franchisor any money. This 5-day rule can run within the 10-day rule.

    In addition, certain states have laws which require the franchisor to register its franchise offering with a state agency and obtain approval or file a notice of exemption with the state prior to selling franchises in such state or to a resident of such state. These states are California, Florida, Hawaii, Illinois, Indiana, Maryland, Michigan, Minnesota, Nebraska, New York, North Dakota, Rhode Island, South Dakota, Texas, Virginia, Washington and Wisconsin. If you are a resident of one of these states, your FOC may have special state-specific pages. Approval by a state or filing with a state doesn't mean the state believes it is a good investment or that you will be successful. That's up to you to investigate.

    During the 10-day period, you should read the FOC completely and carefully. A franchise agreement is usually a very complex, lengthy and imposing legal document - particularly for the average person. It governs your legal relationship with the franchisor over the life of the franchise. Retaining a lawyer knowledgeable about franchising is very important. A franchise attorney can assist you in understanding the franchisor (them)/franchisee (you) relationship and the parties' respective rights and obligations under the franchise agreement. However, you should realize that your attorney will have a limited ability to "negotiate" the deal on your behalf, unlike other types of business transactions. Most franchise offerings, particularly in established franchise systems, are offered virtually on a "take it or leave it" basis. However, that does not mean that you should not attempt to "renegotiate" what the franchisor perceives to be standard boilerplate provisions, particularly where they appear to be unreasonable from your perspective. There are many issues which you need to understand and discuss with your attorney, including (in alphabetical order):

• Advertising Obligations

• Arbitration and Mediation

• Attorneys' Fees

• Contingencies (so you can get your money back)

• Covenants Not to Compete

• Default

• Force Majeure

• Integration Clause

• Jurisdiction and Venue

• Liquidated Damages

• Location of Your Unit

• Obligations of You

• Obligations of the Franchisor

• Payments to the Franchisor

• Post-Termination Obligations

• Renovation of the Premises

• Reporting Requirements

• Sales Restrictions

• Term and Renewal Rights

• Trademarks

• Transfer by the Franchisor

• Transfer by You

    As part of your due diligence investigation, the best thing you can do is visit and talk to as many franchisees as possible to see how they are doing. They are already down the road you are thinking of traveling. Are they making money? How long did it take them to break even? Did the franchisor fulfill its promises? If the franchisees could do it all over again, would they still buy the franchise? It may also be wise to visit the home office or regional office of the franchisor to get a feel for the quality of the operation first hand, and to make sure there are real and knowledgeable people to service and support you and not just one person operating out of a post office box.

    The reason you buy a franchise is to earn a living. How much are you going to make? When will you hit break-even? The FOC (usually ITEM 7) will detail the franchisor's estimate of your total investment, but don't stop there. Develop a business plan of your own. You probably will lose money at first. A business plan will help you understand why -- so that you will be prepared both emotionally and financially -- and not panic. Most franchisors do not tell you how much you are going to make. How can you then determine your return on investment? First, check the FOC (usually ITEM 19) to see if an earnings claim is made. If not, existing franchisees may give you numbers. In addition, have your accountant work with you in this regard as part of the business plan. Don't spend your last dollar on getting the business open. Most businesses lose money in the beginning. You must have sufficient working capital to fund start-up losses as well as support yourself and your family until the business becomes profitable.

    If you operate the franchised business as a sole proprietor, your personal assets are at risk for the debts and liabilities of the franchised business. You should seriously consider forming a corporation to operate the business. Although the franchisor, landlord and your banker may require a personal guarantee, you may insulate yourself to third parties, such as vendors, suppliers, your customers and the general public by forming and operating the franchised business as a corporation. While a corporation is a separate tax paying entity, double taxation can be avoided by electing Subchapter "S" status. A shareholder of a corporation is generally not liable for the debts or other liabilities of the corporation, except to the extent of the money contributed to the corporation.

    Regardless of what entity you use to operate the franchise business, you cannot use the franchisor's trade name as part of your corporate, partnership or other entity's name, but you may have to comply with your state's fictitious name, assumed name or doing business name statute in order to do business under the franchisor's trade name. Consult your lawyer regarding incorporation and fictitious name compliance.

    If the franchised business you are buying is not home-based, you probably will have to lease space in an office building or shopping center. Signing a lease should be taken very seriously, as you are committing to pay many thousands of dollars in rent and other expenses over many years - a liability for which you will, in all likelihood, be required to personally guarantee.

    As you may know, the landlord's standard lease was prepared by the landlord's attorneys to protect the interest of the landlord, not your interest. Certain provisions need to be negotiated and finalized by you and the landlord, such as the description of the premises, lease term, rent, security deposit, build-out, etc. Other provisions which the landlord considers standard boilerplate need to be "renegotiated" by you. In addition, your franchise agreement may require you to add certain provisions to your lease for the benefit of the franchisor. You should retain an attorney qualified in real estate and leasing matters to represent your interest and to assist you in your negotiations with the landlord.

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