Buying a franchise opportunity is a significant investment, not unlike opening a small business. While franchisees have the advantage of a developed marketing strategy, franchisor support and successful business model already in place, they still run into some of the same problems that are plaguing the nation's small businesses.

As a result of the 2008 credit crunch, funding to small businesses and franchisees has plummeted at both community banks and major financial institutions. Lending requirements have grown more stringent, as bank representatives require applicants to have a complete, well-researched business plan in place and a significant amount of collateral to prove that they will not default on a loan.

With these challenges in mind, where franchisees decide to invest their hard-won funds is a matter of supreme importance. Individuals don't want to invest in ventures or systems that will leave them empty-handed and even more indebted to lending institutions. However, with a few simple tests, prospective franchisees can determine if a franchise system is just too risky for them.

According to an article in Entrepreneur magazine, one of the first things prospective franchisees should look at is a system's unit counts. It is by far the simplest test and will give interested buyers a quick look at whether a franchise is growing, staying the same or declining. This information can be found in item 20 of the Franchise Disclosure Document, with which every franchisor is required to provide potential buyers.

Also in the FDD is any record of prior litigation experience during the past few years. This item will give franchisees a good look at the state of franchisor-franchisee relations. If there has been a recent upswing in lawsuits, it may indicate that unit owners are struggling or failing and looking for someone to blame. This is a franchise to be avoided.

Of course, prospective buyers will also want to consider a franchisor's financials. The franchise company is required to provide their last three years' audited financial statements, giving franchisees a window into whether the company is financially stable and has the resources for future growth or if franchisees are struggling to pay their dues.

Finally, buyers should never overlook the importance of talking to current franchisees. These individuals will give prospective franchisees an uncensored and unbiased look into what it means to be a part of a specific franchise system.

The Liberty Tax Service franchise opportunity is #1 in the tax franchise category of the 2011 Entrepreneur “Franchise 500”. Liberty Tax Service is the only tax franchise on the Forbes “Top 20 Franchises to Start.” Our tax franchise is an affordable and viable business choice. Each office provides thorough, computerized tax preparation coupled with superior customer service. For the best small business opportunity in the income tax franchise industry, choose Liberty!