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When the economy slumps, franchising tends to become more popular. Here`s what to know about the industry before buying in

by John Tozzi

 

Think buying a franchise means you get the benefits of owning a business without the risk of business failure? Think again. Without proper due diligence, franchisees can find themselves stuck in bad business models, chained to unfavorable contracts, or victims of fraud.

 

Economic slumps tend to boost the industry, as unemployed workers seek to start businesses with the perceived safety of established systems. The International Franchise Assn., the industry`s largest trade group, estimates there are about 3,000 franchise systems in the U.S. today. The concepts range well beyond fast food, with franchises in industries as diverse as pet care and tutoring services. In 2005, franchised businesses employed 11 million people— more than 8% of private sector workers—and generated 4.4% of U.S. economic output, according to a report by PricewaterhouseCoopers commissioned by the IFA. John Reynolds, president of the IFA`s research arm, expected growth in franchising output and employment to continue at least through the middle of 2007.

 

Talking to these franchisees is an essential part of due diligence, says Tom Pitegoff, a franchise attorney in White Plains, N.Y. "If you talk to nobody else, talk to the ones who left the system and find out why. Does it have something to do with the franchisor and something you should be looking out for?" While ex-franchisees may have sound reasons for leaving the system—retirement, for example— you should find out if they have complaints about the franchisor.

 

For more advice on franchising, including an explanation of franchising fees, and suggestions, call me or email anytime.

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