How to Select a Franchise

There are a number of sources for information on franchisors and franchise offerings.

1. FDD
Although FDD’s are public documents, many companies consider the information contained within proprietary, thus, they do not make them readily accessible to the public. If you contact the franchisor directly to request a copy of its FDD, chances are they will not respond to your request or they will wait weeks before granting your request. Alternatively, you may purchase FDD’s from the state (if the company has registered in that state) or submit a request through a service such as Franchise.com's Franchise E-Disclosure service, which notifies a company of your desire to receive a UFOC. If the company decides to share its disclosure document with you, you will receive an electronic copy. The easiest and quickest way to obtain a FDD, however, is to purchase them directly from companies that sell them.

2. Earnings Claims Statement
The single most important task for a prospective investor is to prepare a realistic cash flow statement that accurately reflects the economic potential of that business. The earnings claims statement provides invaluable insider knowledge of the historical sales, expenses and/or profits of actual franchise operations, as provided by the franchisors themselves.

3. Custom Franchise Research and Reports
FranData provides customized, fact-based research for a wide range of business needs. The company tracks detailed information about the companies that franchise, the franchise concepts they sell, the franchise agreements their franchisees much sign, and the franchisees themselves. Products and services include: Benchmarking, Business Planning, Competitive Analysis, Contact Lists, Custom Research, Financial Products, FranchiseRegistry.com, Special Issue Reports, Subscription Services, Surveys, Targeted Marketing, and FDD’s. Price: Call (800) 485-9570 | Website: www.frandata.com.

4. Current and Former Franchisees
The FDD should include a list of current franchisees, as well as franchisees who left the system within the last year. Be aggressive about pursuing franchisees as a source of insights that are not available elsewhere. Depending on how well you have done your homework and your ability to ask questions that show a solid understanding of the basic business and its underlying economics, other franchisees should be willing to respond to your questions about: the major cost elements of the cash flow statement, the biggest surprises they encountered when they started their business, whether to buy supplies from the franchisor or from a third-party supplier, potential lenders, negotiable points in the franchise agreement and more. In reviewing finances, pay particular attention to the major expense items and see if there are any expense categories that you may have left out. Spend some time at a franchised unit to get a feel for the day-to-day operations of the business.

5. State Franchise Regulators
If you are in a state with franchise registration requirements, the state franchise regulators can tell you whether the franchisor is in good standing. They may also be able to tell you whether there are any pending complaints against the franchisor. The North American Securities Administrators Association, Inc. (NASAA) website (www.nasaa.org) contains a directory of each state's franchise regulators.

6. Franchise Attorneys
Franchising is a highly specialized field, and you should hire legal experts with experience representing franchisees or franchisors. Franchisingattorney.com has a searchable directory that provides 25 fields of information about each attorney listed. Visit www.findlegalhelp.org, a site sponsored by the American Bar Association, to learn about referral services and issues you should address when consulting with a lawyer. Another source for examining an attorney's credentials is www.martindale.com. The franchise associations below may also provide referrals to experienced franchise attorneys.

7. Franchise Consultants
If you are using a franchise consultant or service provider, they can likely assist you with your franchisor research. www.efccompany.com

8. SEC
If a franchise is a publicly traded company, it is required to file certain information with the U.S. Securities and Exchange Commission. These filings are available online at www.edgar.gov.

9. Online Tutorial
Access the Franchising University section of Worldfranchising.com for a quick online tutorial on the franchise selection process.