1. Make sure the seller of the franchise supplies you with a copy of a prospectus approved by the Office of the Attorney General and that you read it carefully.
   Under New York state law you must receive a prospectus at least 10 business days before you are asked to sign a contract or pay money to the franchisor. When you receive a prospectus you will be asked to sign a receipt for it. Make sure that the date on this receipt is correct, and keep a copy for your records. A dishonest franchisor may attempt to satisfy the 10-day rule by back-dating the receipt without your knowledge. The franchisor may also ask you to consent to the back-dating in order to complete the transaction at an earlier date than allowed by law. You should refuse. The 10-day rule is designed to afford you time to thoroughly examine the prospectus and make an unhurried decision about whether or not to invest in the franchise. To check if a franchise is registered, call the franchise section of the Office of the Attorney General at (212) 416-8236 or (212) 416-8233.

    

2. Consult with an attorney, an accountant or another professional with business or financial experience in the field of franchising before paying any money or signing any documents.
   In the business world, you get what you pay for. If you cut corners on professional advice, you will regret it later. You should seek professional legal and/or accounting advice, especially from someone who is familiar with the field of franchising, to help you make an informed decision. An attorney can help you understand the franchise contract, which is part of the prospectus. (See pages 13-14to learn what questions to ask your lawyer. Also, the American Franchisee Association lists attorneys on their website (www.franchisee.org) who specialize in representing franchisees.) Ask your attorney to explain complex matters such as royalty payments, advertising fees, copyright infringement, and the effect of contract violations. Choosing a lawyer you are comfortable with and that you can afford may take some investigation, but will be worth it. Find out in advance the cost of the initial consultation will be before seeing the attorney.

   An accountant can explain the financial statements that are also part of the prospectus. These statements tell you whether the franchisor is financially strong or weak and whether the franchise is profitable or unprofitable. If the franchisor is financially weak, consider very carefully before you buy; the franchisor may be selling franchises as a way of raising cash just to stay in business. The financial statements can also tell you whether the franchisor is devoting sufficient funds to the franchising aspects of the business or keeping most of it as profit. You should not attempt to extract this important information from the prospectus by yourself unless you have considerable background in these matters or in the type of business that you are considering.

   Carefully study the estimate of initial expenses contained in the prospectus. Franchisors may underestimate these expenses in an effort to make the cost of purchasing a franchise seem lower than it really is. If the estimate is too low, you may find yourself with insufficient cash to carry on until the business produces a profit. Relying on the UFOC without consulting a professional and hoping that the franchisor has told the truth is setting yourself up for potential fraud. See page 16for a list of associations and government agencies to help you in your research.

    

3. The experience of others is one of the most effective guides you can use to determine how you would do if you purchased a franchise.
   The prospectus should disclose the names and addresses of individuals currently operating franchises in New York and adjacent states. Contact them and ask them how their franchises are doing. Visit the franchised premises and observe the volume and type of business being done. Pay attention to the number of franchises terminated during the past three years—an unusually large number may be a telling sign of how the franchisor does business. The prospectus should disclose the names and addresses of franchisees who have dropped out of the system within the last year. Contact them to find out why they dropped out.

   It is important for you to communicate with every listed franchisee, if this is practical, or a large sample of them, if it is not. The more franchisees to whom you talk, the more you will learn about the franchisor and the chain. (See pages 11-12for a list of questions to ask franchisees). A franchisor may attempt to supply you with a list of selected franchisees to contact. View this with suspicion. Those on the list may be "shills"—franchisees being paid by the franchisor to give you a good opinion of the business. Indeed, if the franchisees on the list are far away and not likely to be visited personally, they may not be franchisees at all, just dishonest people on the other end of the telephone.

    

4. Look for a territorial protection clause in your contract.
   Encroachment is one of the most litigated issues in franchising. Whether you are a fast food franchisee who finds another unit has opened up a few blocks away, an ice cream franchisee who sees his product being sold in the corner grocery store or a franchisee who discovers that his franchisor is taking orders over the Internet—all of this adds up to lost profits for a franchisee who has spent years building up a business.

   Protected or exclusive territory is the area around the franchisee’s business location in which no other branch of the franchise is allowed to open a store. The extent of the protected territory may be defined by the radius from the outlet’s location, the number of households and businesses in the area, the number of people living in the area, zip codes, state or highway boundaries, or some other measure. Sometimes, the franchisee must meet certain sales quotas or performance standards in order to keep the exclusive territory. Before signing the contract, you should determine if the protected territory is large enough to carry out the franchise’s business objectives in light of the competition which will come from other branches of the franchise.

   The protected territory clause in the original contract, as discussed above, will clarify exactly what is and is not considered exclusive territory. Courts often uphold the idea that if there is no specific protected territory clause in the original contract, the franchisee has no legitimate encroachment claim, so make sure you are clear on exactly where your franchisor can and cannot open stores. Sometimes, the franchisor will make a deal with an existing franchisee. The franchisor will allow a store to open within the exclusive territory and the franchisee will receive a percentage of the profits from the new store. This is called a reverse royalty.

    

5. You should understand that although you will be the owner of your own business and thus bear the consequences of its success or failure, you will not be independent.
   You will be part of a chain and will be expected to conform to certain rules designed to assure that the product or service which you deliver to your customers is of the same type and quality as those delivered by other franchisees in the chain. Uniformity is very important to a franchise chain and you will be required to observe the rules concerning it, even though you may find them ineffective or unprofitable and have better ideas of your own. If you are an independently minded person, franchising may not be for you.

    

6. Be aware of non-compete clauses.
   Even after you have relinquished control of your outlet, your contract still holds and it will probably contain a non-compete clause. This section prevents you from owning or operating a competing business within a certain geographical area for a specific time period.

    

7. Widespread customer recognition of a trade name is the equivalent of goodwill in franchising.
   The trade name is the symbol of the franchise chain’s quality. Anyone familiar with a trade name has an idea, whether true or false, of the quality that the name represents. The same is true of the name you will be purchasing when you buy a franchise. If the name is unfamiliar to you and your friends, you should ask yourself whether you are getting your money’s worth in buying the franchise. If the franchise name is recognizable, you will have a head start in the marketplace. Opening a franchise center may give you the benefit of a well-known reputation, but it is not a guarantee that you will make a profit. No franchisor can guarantee that your outlet will be profitable. Franchising is similar to other businesses in that it takes a large amount of resources, especially time and money, to operate successfully.

   No doubt you intend to do your best to see to it that the franchise name will stand for high quality, but the decision is, once again, not entirely in your hands. The performance of the other franchisees in the chain will also affect the quality associated with the name, as will the leadership and imagination of the franchisor itself. If others in the system do a poor job, the ill will which ordinarily attaches to such performance may be transferred to your business. Also, the franchisor’s willingness to keep the name before the public through advertising and to keep things up-to-date through research and development is of key importance. A franchisor or other franchisees who fall down on the job may ruin a franchise name no matter how hard you work.

   Extra caution should be taken when a franchise is being acquired from a new franchisor or from a franchisor who does not have its trademark federally registered. What type of trademark protection has the franchisor sought? Are there any possible conflicts with its marks that could affect you, the franchisee? In the event a problem arises with the franchisor’s mark or if another chain acquires the franchise system, does the franchisor have the right to require the franchisee to change its mark?

    

8. Examine the site selection process outlined in the prospectus, as the location of a franchise is very important.
   A poorly selected site may well doom a franchise no matter how attractive its features. Determine what the franchisor will do to assist you in selecting an appropriate site and whether you will be able to change the site if it proves to be unsatisfactory. Find out if relocation rights are granted to the franchisee in the event of condemnation, lease expiration, or pure business results, or is relocation a matter of the franchisor’s then-current policy. Is there any type of territorial exclusivity included in the contract? If so, what is the exact nature of any exclusivity or protection granted? Is it contingent upon achieving certain performance levels? If the franchisor’s participation in the site selection process appears to be perfunctory, or if the franchisor offers no assistance, think twice about buying. If you are purchasing an existing store or route, find out why the previous franchisee is no longer with the company.

    

9. Training is one of the distinct advantages of franchising.
   It enables the franchise operator to acquire within a short time the skills that an independent operator might take months or years to acquire. If the training described in the prospectus is not sufficiently detailed, ask about it. Also ask existing franchise operators about the training they received. While a well thought-out training program can be an effective substitute for the trial and error of experience, you should be aware that there is no complete substitute for experience or natural business talent. Ask any businessperson; learning a business can take years and that one never stops learning.

    

10. Look for the existence of franchisee advisory groups and associations.
    Both advisory groups and associations are organizations of franchisees, but they differ in their roles in the franchise chain. Advisory groups are organized by the franchisor and are composed of franchisees and franchisor representatives. They help the franchisor make decisions, voice complaints, and form relationships with other franchisees. Franchisee associations, on the other hand, are usually independent of the franchisor. They have their own system of organization, rules and membership requirements. Franchisees pay dues in order to fund the activities of the association. In some cases, an advisory group and an association coexist in the same franchise chain. If your franchise has an association or advisory group, it usually implies that the franchisor takes seriously the requests and ideas of the franchisees, and these are often the strongest franchises, with franchisees who feel that their voices are being heard. You should speak to representatives from the franchise advisory group/association to ensure that franchisors listen to their franchisees.

     

11. Know the franchise seller.
    A franchise agreement is only as good as the people behind it, regardless of how good it looks on paper. The prospectus gives certain information concerning the employment background of the principals of the franchisor and their litigation histories. Check their employment background in the prospectus to see if they have been employed in franchising or a business related to the franchise being sold. Examine their litigation history. An excessive number of claims against them may mean that they have not been performing according to their agreements.

    The franchisor’s experience in selling franchises and managing a franchise chain is as important to you as the training you will receive to operate your own outlet. If the franchisor has little experience in managing a chain of franchises, you will find that the guidance, training and other support you receive may be unreliable.

Source: New York State Office of Attorney General