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Take stock before leaping in

ALBUQUERQUE, N.M. — Before considering any investment, Joel Libava of TheFranchiseKing.com said potential franchisees should have “a meeting with (themselves)” to determine what type of company would best suit their personality and skills, and also to take stock of their financial situation. It’s important to have a budget, but also to know your net worth – he has a free calculator tool on his website – because many companies use that figure to screen candidates.

When zeroing in on specific opportunities, Libava recommends that potential franchisees make an effort to get to know the company’s franchise development person. Ask questions about what they look for in the ideal franchisee and what the company’s failure rate is.

Before investing, speak with other franchisees about their individual experience, he said. Some companies may provide a list of franchisees to call, but don’t rely only on those since they’re likely to be among the company’s most successful. Call others who might not be doing as well to get a more complete picture.

“You’ve got to find happy ones and unhappy ones,” he said.

Libava highly recommends hiring an attorney who specializes in franchise agreements. Also, closely examine the company’s franchise disclosure document, or Franchise Offering Circular. The document offers critical details about the company, including any litigation the company has faced and whether it or its executives have been involved in any recent bankruptcies. It also provides details about a franchisee’s costs and lays out other terms for the franchisor/franchisee relationship.

The Federal Trade Commission requires companies provide the document to potential franchisees at least 10 business days prior to asking for any signatures or payments. If the company stalls when asked to provide it, Libava said it may be an effort to postpone unflattering revelations. He called that a “huge red flag.”

When making an investment decision, Libava said it’s always best to move cautiously and take the necessary time to do solid research.

“Don’t let the emotion get in the way,” he said. “Even though you will be emotional, make your decision based on facts. You don’t have to rush.”

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