A wise investor, experts say, is a well-informed one, and this is especially true for those interested in becoming part of a franchise. While there are many significant advantages to using the franchise system, there are also potential pitfalls involved.

According to an advisory from the North American Securities Administrators Association, many potential franchisees aren't fully aware of some of the risks involved when they sign their agreements, and some aren't even familiar with the complete details of their deals.

The fine print, then, is critically important. NASAA says one detail that some franchisees may miss is the time limit of their agreement. Not only do some agreements not automatically renew, certain conditions may have to be met before the franchisor will consider a new deal, including disadvantageous new terms.

Additionally, NASAA says, the letter of the law is a lot more important than discussions between a potential franchisee and the parent company. While franchise sellers may promise a great deal during negotiations, these are completely unenforceable if they aren't a part of the written agreement.

Franchisees should also make sure they have a way out of their agreement if it becomes necessary. Even failed businesses are still subject to the deal between the franchisor and the business owner, and NASAA says some of the latter could even sue for anticipated profits from the business if the owner tries to get out of his or her agreement early.

Prospective franchisees should be wary if a company does not divulge the earnings of its existing franchises in disclosure documents. Although it's not required, NASAA says one possible reason for omitting the information could be that the franchises are not making much money.

More generally, however, the group says that business owners should make sure they know the franchisor's requirements in depth before signing on the dotted line. Many require certain menu items to be served, others restrict the suppliers a franchisee may use, and still others mandate certain types of décor. No matter how much a business owner may wish to use another supplier, they must abide by the agreement, NASAA says.

The organization says more complete information about state franchising offices is available on its website.

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