The first test of the financial stability of a franchisor and the viability of franchise is to ask how long the product or service has been on the market.

Unless the franchisor is able to prove to your satisfaction that the product or service has yielded at least three successive years of profitable trading, (preferably five years) the franchise proposal should be regarded as potentially more risky.

The second test is how the franchisor's financial statements and profit projections stand up to expert independent scrutiny.

The financial strength of the franchisor is crucial to your survival. Imagine where you would be if the advertising support you had been promised and the supply of the franchise materials or support services dried up because the franchisor "went broke". Gather all the financial data pertaining to the operation of the proposed franchise and present it to your accountant for financial analysis. If there is a flaw in the financial picture presented by the franchisor, your accountant should be able to spot it.

Your bankers would be able to obtain an up-to-date credit rating on the franchisor and its principals. It would be prudent to obtain a credit rating from a credit-checking organization. Be aware that some credit-checking organizations only update their data at half-yearly intervals. You should obtain current information. Your accountant will guide you on this important issue.

The franchisor is also bound to inform you of any on-going or pending litigation against the franchisor.

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