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What should I look for when reading a franchise disclosure document?

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  4.  » What should I look for when reading a franchise disclosure document?

Opening your own franchise is a great business opportunity. Not only will you have the backing and resources of an established enterprise, you will also have access to a loyal customer base. However, making the wrong decision will quickly dampen your dream of business ownership. 

Identifying warning signs of a poor franchise opportunity safeguards you against making the wrong choice. Many of these warning signs can be found in the franchise disclosure document itself. Here are a few things to look for while performing due diligence. 

Higher than normal fees 

All franchisees enter into agreements knowing they will be asked to make a sizable financial commitment. However, when the fees charged by the franchisor are well above the industry average, it could be a bad sign. Fees should be commensurate to the overall success of the business (meaning more lucrative franchises usually cost more to operate since they involve a greater chance of success), as well as the costs for operating. 

Legal & financial issues  

Lawsuits can impact even successful businesses, but many instances of litigation signal a problem with operations. A prior bankruptcy filing is also a worrisome sign. Bankruptcy has lasting effects, and if the causes for the initial filing aren’t remedied new franchisees will be directly impacted. 

Not including a financial performance representation 

Financial performance is an undeniable indicator of success. A financial performance representation lists the financial successes and failures of a business, which is why many successful franchisors include it in the disclosure document. When not included, the potential franchisee must compile this information on their own. While there are other reasons for not including financial performance information, it is a common way of concealing poor financial performance.