3. Read the UFOC ASAP.
It stands for Uniform Franchise Offering Circular, and federal law requires all franchisors to provide it to any potential franchisee. The document itself provides a great deal of information about the franchisor, and understanding it is one of the most important moves you'll make as a potential investor. The UFOC includes: the franchisor's history and a list of officers and directors; a complete description of the business you'll potentially be running; all costs, fees and obligations you'll be subject to under the terms of your agreement; a description of any lawsuits, business failures and other potentially damaging situations the franchisor has been involved in; the franchisor's audited financial statements for the last three years; and the names of all its former and current franchisees.

When Elgin reads a UFOC, he pays special attention to two items: No. 3 and No. 20. While the exact numbers can vary, you should watch for these two red flags: litigation between franchisees and the company, and the number of franchisees that have been terminated. "If you open it up and there are 100 pages of litigation, you shouldn't have to read all 100 pages to know you should move on down the road," Elgin says.

You should also be aware of which costs are fixed and which are variable, says James Holtzman, a CPA and CFP at Legend Financial Advisors in Pittsburgh. It's one of the most common mistakes his clients make when signing up with a franchise company. Holtzman says they're often surprised a few months down the road when they get the bill for marketing fees for national ad campaigns or product rollouts.

4. Call at least five franchisees.
Once you've read the UFOC, it's a good idea to ask franchisees about any issues they have run into with the franchisor in the past. A familiar complaint is "encroachment," which means a franchisee is losing business because the parent company has allowed another franchise location to open too close to his or her shop. While a franchisee can win an encroachment case, there are often clauses included in the franchise agreement that limit a franchisee's ability to sue over such an issue.

Because a franchise company is required to give you the names of all current and previous franchisees, it's a good idea to call at least one franchisee involved in a court case. Call several others who aren't involved in litigation. Ask them how many hours they work each week, how much support they got from the parent company in the start-up phase, and if they're satisfied with the ongoing support they receive. If you feel comfortable, ask how much money they invested up front and how long it took for their operation to be profitable. If you've signed up with one of the more popular chains, there might be a specific franchisee association that can help you with more information or support. Subway franchisees, for example, have their own association, as do Burger King's franchisees.

5. Find the person at the corporation who will be answering your phone calls.
While it helps to meet the franchise company's executive board and CEO, "you're not going to be asking the CEO for help when your electricity goes out," says Elgin of FranChoice. Find the support staff or regional manager you'll likely be working with and ask questions about supply costs, what to do when supplies don't arrive, how to handle technical problems, and how you and your workers will be trained. What are the best practices of the most successful locations, and are there systems in place for transferring such knowledge to others? If the company is unable to answer your questions, or you're unsatisfied with any of the answers, don't sign an agreement, and don't be afraid to walk away from a deal, says Elgin. "There are lots of franchise companies out there," he says. "You don't have to compromise and take something you're unhappy with."

6. Make conservative estimates of your potential earnings, and plan for retirement accordingly.
You might think that simply owning five Whataburgers will be the key to retirement bliss. But huge chains, like small ones, can falter or fail, and that leaves franchisees holding the bag. Whether or not your chain is a soaring success, restrictive legal clauses in the franchise agreement might make it difficult to resell your business back to the company or to a new owner in a timely fashion, says Holtzman, the CPA. If your franchise company offers retirement planning, like a 401(k), take full advantage of it. If it doesn't — and many don't — you need to start socking money away in a retirement account or investment plan on your own. 

FRANCHISING BUSINESS IS, at its core, antagonistic, says Tom Schmidt, an attorney who is suing the Houston-based Marble Slab Creamery ice cream chain on behalf of nine Marble Slab franchisees. It's obviously in a franchise company's best interest to see its franchisees succeed. But franchisees must also play by strict rules, and those rules are constantly changing according to the parent company's whims, he says. Even if franchisees start out with a great deal of enthusiasm for the system, they might grow tired of being told what to do. "The franchisee naturally doesn't like the franchisor after a while," says Schmidt. "It creates an atmosphere that's ripe for disputes."

Franchise companies are required to disclose, in their Uniform Franchise Offering Circular, a complete history of any litigation they've been involved in, including disputes with franchisees. Before you invest in a company, you should inspect this part of the document closely and investigate the issues by calling the franchisees involved. (Their contact information will also be included in the UFOC.) There are many kinds of legal disputes that can arise between franchisor and franchisee, but they fall broadly into three categories:

1. Disputes over earnings claims.
Even though it's not supposed to, a franchise company is likely to make some claim about a franchisee's potential earnings. The claim may be very vague — from "We expect you to break even within six months" to "Another franchisee in your area made $300,000, and you should do the same," says attorney Jim Long, of the Minneapolis-based law firm Briggs and Morgan. The company might also offer one particular store as an example, disclosing details about that store's sales and profit figures to show would-be franchisees what they could earn. When franchisees invest in a business and find they're not making as much as the company promised, they might take their complaints to court, claiming the franchise company misrepresented itself. Some states have special franchise acts, and in those states franchise companies can be accused of both misrepresentation and omission of certain relevant facts, says Long.

2. Disputes over terminations or the sale of a business.
Most franchise contracts contain language about special procedures for terminating a franchisee. A franchisee might be fired over any number of issues, including poor financial performance, violations of health and safety codes, or unauthorized forms of advertising. In most cases, a franchisee will receive 30 days notice before a termination, though in some states the notice period can be 60 days or longer. A franchise company might simply want to replace one franchisee with another, and there may be a clause in their contract that allows them to do this. But a franchisee may have any number of legitimate reasons to take issue with a termination, and the disagreements often end up in court. A franchisee might also wish to sell a business for a certain price or at a certain time, but clauses in the franchise contract may allow the franchisor to exert control over any or all aspects of the sale.

3. Relationship issues.
A franchisee might feel that he or she is not receiving proper support from a parent company, or that certain requirements — like buying expensive equipment and supplies, or funding national ad campaigns — are unfair. Franchisees that buy into businesses in which the corporate parent owns and operates some franchise locations may also feel that the corporate-owned stores have unfair advantages over them, and they may take those complaints to an attorney. Another common complaint among franchisees is "encroachment," which means the corporate parent has allowed too many other franchise locations to operate in close proximity to theirs, and the franchisee feels the other locations are hurting their business.