Proper Franchise Due Diligence Can Reveal Avoidable Risks
While purchasing a franchise can be seen as a way for an individual entrepreneur to realize his "American Dream," a prospective franchise owner should nevertheless conduct a thorough pre-acquisition due diligence before signing on the dotted line. The risk involved with becoming a franchise owner can be managed (or even avoided) by adhering to five best practices when researching a potential franchise, writes Morgan Ben-David.
June 05, 2017 at 10:59 AM
9 minute read
While purchasing a franchise can be seen as a way for an individual entrepreneur to realize his “American Dream,” a prospective franchise owner should nevertheless conduct a thorough pre-acquisition due diligence before signing on the dotted line. The risk involved with becoming a franchise owner can be managed (or even avoided) by adhering to five best practices when researching a potential franchise.
• Read the Franchise Disclosure Document and Relevant Agreements.
The Federal Trade Commission Franchise Rule, 16 C.F.R. Part 436, requires franchisors to provide potential franchisees a franchise disclosure document (FDD) at least 14 days prior to signing a binding agreement or making any payment to the franchisor in connection with the sale. The FDD contains 23 specific items of information about the franchisor, the franchise system and the agreements a franchisee will need to sign. While the FDD can be lengthy, potential franchisees can make a well-informed decision, by itemizing and simply reading, the FDD.
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