Why Some Franchise Buyers Almost Always Make Mistakes

If you're thinking about purchasing a franchise, pay close attention to the franchise disclosure document (FDD)--the large document that contains disclosures about the franchisor and franchise system.

Item 20 of the document can seem daunting, but be sure to dig in and examine the information it contains. This section is made up of five tables that show the status of outlets within the system over the past three years.

Table 1: History of system outlets

Table 1 summarizes the history of system outlets over the past three years. It shows the number of franchised outlets, the number of company-owned outlets, and the number of total outlets. This chart is important because you can see if the franchise is growing or declining.

Table 2: Transfers

Table 2 shows the number of transfers by state from existing franchisees to new owners. A high number of transfers, particularly within one state, could indicate franchisee difficulties in that locale.

Table 3: Status of franchised outlets

Table 3 shows the status of franchised outlets by state for the last three years. It also provides details on the number of terminations, non-renewals, and units reacquired by the franchisor.

Terminations and non-renewals occur less frequently these days, so it's important to look at the number reacquired by the franchisor because franchisors often use this method to take care of stores that are in trouble.

A high number of terminated, non-renewed, or reacquired franchisee stores--particularly within a state--may be cause for concern.

Also, look for stores that have ceased operation for other reasons.

Table 4: Status of company-owned outlets

Table 4 shows the status of company-owned outlets over the last three years, including the number of outlets closed or sold to franchisees. In large systems, this table shows how the franchisor is fairing with its own stores. A decline in the total number of outlets may indicate trouble or that the franchisor is simply selling its stores to franchisees.

Table 5: Projected openings

Table 5 shows projected openings and provides the number of outlets the franchisor expects to open over a period of time. This gives you an idea of whether the franchisor anticipates growth in the near future and in what locations.

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