Savvy Solutions: Franchise Deal Too Good To Be True?

What questions do I need to ask so I don't get taken advantage of?

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I am looking into a franchise opportunity. They’re offering a special program where I would make a down payment of less than 20% and they would help finance the rest through an unsecured loan. What types of questions should I be asking to make sure I don’t get blindsided?

Tim S.
Greensboro, NC

An unsecured loan has no collateral or assets that the issuer can possess if the loan goes into default (think: credit cards). The credit is obtained with only a promise (and credit score) that it will be repaid by the borrower (i.e., you). These types of loans typically have shorter payback terms and higher interest rates. Before you sign obtain the terms and review them carefully with an attorney, and devise a plan for repaying it. The same goes for signing a franchise agreement. Have a lawyer who specializes in franchising or distribution law at your side when purchasing a franchise system.

Be sure to review the Franchise Disclosure Document, or FDD, which offers detailed information about the franchise operation. The Federal Trade Commission provides important industry information and guidance about franchise business opportunities. The International Franchise Association is also a good resource.

You should also check out the company’s track record. The FTC and the Better Business Bureau compile reports of consumer complaints about a franchise or company. Of course, don’t be afraid to shop around for other franchise opportunities (see “20 Recession-Resistant Franchises,” September 2009). And before you make a decision, take our quiz and see if you’re really ready to make the leap into franchising.

Tennille Robinson is the small business editor at Black Enterprise.

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