Should You Be a Guinea Pig for a New Franchise?

Cliff Ennico on

"I was downsized from a corporate job about a year ago. I have never run my own business before, but I am realizing now there is no future for me in corporate America (I am over 50 years of age), so I am looking at entrepreneurial options.

My outplacement firm recommended that I consider buying a franchise. The problem with franchises, though, is that the only really good ones are too expensive.

I was approached recently by a franchise that's just getting off the ground. It's a restaurant concept founded by an award-winning chef.

The problem is that the franchise has no franchisees yet. I would be the first.

How do you evaluate the risks in a franchise when you can't talk to other franchisees?"

It used to be that franchise developers would open and run at least 20 or 30 outlets before selling their concept to franchisees. Not anymore. These days, anyone with a franchise concept and the money necessary to register with the Federal Trade Commission, or FTC, is launching a franchise. As with any new venture, the buyer must beware.

Here are some things to think about before you commit your time and money:

Is the franchise properly registered? About a dozen states require franchises to register with a state government agency (usually the attorney general's office) before they legally can offer franchises to in-state residents. If you are living in one of these states, you should ask the franchise owners whether they are registered and get ahold of their registration documents (these are often more detailed than the franchise disclosure document on file with the FTC).

If you are in a registration state and the franchise is not yet registered there, do not do anything until it is.

Do the people running the business know what they are doing? Just because someone is a brilliant chef does not mean he knows how to run a successful restaurant. Spend lots of time speaking to the franchise management team members, and ask some tough questions, such as:


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