[franchise] where you just get in and become successful because you’re in,” Bias warns. “[People have] got to realize that profits are made off of pennies and if you don’t put those managerial attributes to work then it won’t work.”
Determining the future of a franchise
Not all franchises are established to the point where a proven and vetted business plan is available. The Small Business Administration warns that investing in a financially unstable franchise is a significant risk. That risk may increase with franchises that are not well established or franchises that are based in sprouting industries. If a company goes out of business or into bankruptcy after money has been invested, then an owner’s recourses might not be recompensed. “Sometimes the parent company may go under but the individual system could still operate,” says Brewer, who adds that an interested investor should read the disclosure form carefully before entering into any agreement.
The IFA works in conjunction with the Congress and Federal Trade Commission on improving the industry’s relations with franchisees and to protect them from fraud and predatory franchises.
Finally, the SBA advises that speaking with current and former franchisees is probably the most reliable way to verify the franchiser’s claims. “The anonymity of the Internet is not going to help you,” Biskup warns. “You need to make contact with people to understand the strengths and weaknesses of the system.”
The Federal Trade Commission, which regulates franchises suggests on their website that before purchasing a franchise potential investors should check with associations of franchisees who are operating similar outlets. They can provide information about the relationship between the franchisor and its franchisees.