Considering a Franchise Opportunity? Four Tips to Help You Avoid a Potential Financial Disaster

Many people believe investing in a franchise that is a big national chain is a fairly safe bet. As experienced Los Angeles franchise attorneys, the team at Spotora & Associates knows all too well that the “big boys” can find themselves in financial trouble as easily as a small business owner. There are a variety of reasons some of the most well-known franchises get into financial trouble, from excessive debt to overexpansion.


Earlier this year, Radio Shack announced that it would be closing 20% of its stores; 900 of those stores were operated as franchises. Quiznos Sub filed for bankruptcy protection the same month that Radio Shack made its announcement. With franchises, there are no guarantees of success. We have four tips to help you ensure to the greatest extent possible that you are making the right decision.


First of all, know the financial status of the franchisor. You can get this information by reading the franchise disclosure document, required by the Federal Trade Commission, all the way through. Because these documents are fairly long, many potential franchisees fail to read the financial disclosure section. This section includes audited financial statements, so you can determine if the franchisors’ financial situation is solid.


Check out the SBA loan default rate. Generally, when a franchise has a substantial number of franchisees whose SBA loans go into default, it is a sign that the franchise is high risk, and that the system is not working as it should. Think long and hard before going into a franchise system that appears to be high risk.


What obligations are in the franchise agreement? Many franchisors are not obligated to do anything, other than grant the right to the franchisee to use its system and marks. You may think that should the franchise run into problems that lead to bankruptcy, they can go it on their own. The fact is, if the parent franchise has problems such as a shortage of funds to purchase supplies or provide training/marketing, it will trickle down to you. Many franchisees have little or even no recourse, so read every word of the franchise agreement carefully.


Has the franchise been involved in a lawsuit or two? It isn’t unusual for a franchise to be involved in a lawsuit, however if you see a long history of litigation involving a franchisor and franchisees, it is a sign you shouldn’t ignore. While the Franchise Disclosure document should mention any lawsuits, you can also find information regarding litigation at


Before you make a final decision on purchasing a franchise, have a qualified LA business attorney look over all agreements and documents to make certain it is a smart move. Having a second opinion and a second “set of eyes” often helps make you feel more confident in your decision.


This entry was posted on Monday, December 22nd, 2014 at 10:06 am and is filed under Uncategorized. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

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