By SARAH E. NEEDLEMAN

Thinking about buying a franchise?

Before signing on the dotted line, it’s critical to do due diligence on the brands you’re interested in– a lot of due diligence.

Franchise systems vary greatly, and not just in terms of the products and services they sell. They also have different rules on how franchisees can and can’t run their businesses.

Some brands have a history of performing better than others, and the relationship between franchisees and franchisers isn’t always warm and fuzzy.

Most of what you need to make an informed decision about a franchise system is readily available. Franchisers are required by federal law to provide prospective buyers with disclosure documents at least 14 days prior to a sale.

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These documents may have details that can give you insight into a system’s strengths and weaknesses, including the franchiser’s revenue, the number of units that have been sold and resold over the years, and whether the franchiser has been involved in any significant lawsuits.

Justin Klein, a franchisee attorney in Red Bank, N.J., suggests calling or visiting several of a system’s current and past franchisees. “They will tell you the dirty laundry,” he says. The names and phone numbers of all current and past franchisees are listed in franchise disclosure documents.

One tip: California, Wisconsin and Minnesota have free national databases online that contain franchise disclosure documents for many, though not all, franchise systems.

These documents are typically several hundred pages long and loaded with legal terminology and data. You may want both your accountant and attorney to help you make sense of it.

If possible, get a copy of a system’s disclosure documents before meeting with someone from its sales team. “A franchiser salesman will make you fall in love with the concept as if you were a customer,” says Michael J. Webster, head of the International Association of Franchisees and Dealers LLC. “You will be so in love with the marketing idea that you won’t be sufficiently skeptical about the business model.”

Disclosure documents also include a system’s franchise agreement, which is an overview of the requirements of the relationship between the franchiser and franchisee. For example, many agreements have arbitration clauses that prevent individual franchisees from suing a franchiser in court.

On that note, if you’re wondering whether a franchiser has ever been sued, consider that federal law mandates that franchise disclosure documents cite any significant litigation it’s been involved, including lawsuits filed by franchisees or groups of franchisees.

“Any time a franchiser discloses the fact that a significant amount of their franchisees are up in arms against them, it’s pretty serious business,” says Mario L. Herman, an attorney in Washington, D.C., for franchisees including Denny’s Corp. and 7-Eleven Inc. For someone thinking about buying a franchise, such information is “a red flag,” he says.

Write to Sarah E. Needleman at sarah.needleman@wsj.com

By TERI EVANS

When Andrew Schuman bought Hammond’s Candies in 2007, the nearly 90-year-old candy company was operating in the red. Mr. Schuman, who says he knew nothing about the candy business, soon learned that an assembly-line worker, rather than an executive, had dreamed up the design of the company’s popular ribbon snowflake candy.

It was an “aha” moment, he says. “I thought, ‘wow, we have a lot of smart people back here, and we’re not tapping their knowledge.’ “

So last year Mr. Schuman decided to offer a $50 bonus to assembly-line workers who came up with successful ideas to cut manufacturing costs.

“They’re the ones making and packing the candy, so I thought they probably know how to do things better and more efficiently,” says Mr. Schuman, president of the Denver, Colo., company, which has about 90 employees.

The informal idea program, which is open to all Hammond’s Candies workers, has handed out more than $500 in employee bonuses since it began last year. One worker suggested a tweak in a machine gear that reduced workers needed on an assembly line to four from five.

Another employee devised a new way to protect candy canes while en route to stores, which resulted in a 4% reduction in breakage. “It’s these little tiny things that someone notices that help us in the long run,” says Mr. Schuman, who adds that the company was able to earn a profit this year.

Mike Hall

As more entrepreneurs turn to employees for innovation to gain even the slightest advantage in a still-sluggish economy, many are discovering the usefulness of cash incentives or other rewards to encourage workers to come forward with ideas. Particularly for small businesses with limited resources, it’s a relatively cheap way to gather “lots of ideas and get people proactively thinking about what would make the product, service or company better,” says David Hsu, entrepreneurship professor at the University of Pennsylvania’s Wharton School.

Mike Hall, chief executive of Borrego Solar Systems in San Diego, introduced two quarterly employee contests this year, each with a $500 prize. Beyond the competition, the company’s 55 employees are rated on innovation in their annual reviews.

One contest seeks the best business innovation, which Mr. Hall says must be formalized on paper to include the problem the idea solves, as well as its costs, risks and benefits.

The other competition rewards the best “knowledge brief,” which requires employees to share valuable information that can benefit the company as a whole. For example, one worker won for creating a glossary of acronyms in the solar industry.

“It accentuates the importance of disseminating knowledge and trying not to hold it in silos,” Mr. Hall says. Winners are determined by a companywide secret ballot.

Prof. Hsu says finding unique ways to reward employees for their ideas is a way to foster esprit de corps. “It’s why a lot of people work for small businesses in the first place; there’s a closer connection in the effort they put forward and the final product,” Prof. Hsu says.

Jared Heyman, founder of Infosurv, a market-research firm in Atlanta, says his company has long turned to employees for business ideas. “In every industry, as soon as one company creates an innovation everyone else is then playing catchup,” he says.

Five years ago, Mr. Heyman began awarding a $150 restaurant gift card every quarter to the employee with the best business idea. One employee won for developing a technology innovation that helped the company retain a major client that was about to jump ship.

“The [ideas] program has paid for itself a thousand times over,” Mr. Heyman says. “In terms of cost savings, revenue enhancement and efficiencies, it’s certainly in the six-figure range.”

This year, he upped the ante with a second contest, 100 Days of Innovation, in which the company’s 15 employees have to come up with a total of 100 innovative ideas by year’s end in order to each receive a $100 reward. Employees write their ideas on post-it notes and stick them on the “Innovation Board,” created to provide a visual reminder.

“I think a lot of folks are motivated by the fact that if we fall short nobody wins anything,” Mr. Heyman says. “It reminds everybody that we work together and we’ll succeed or fail together.”

By SARAH E. NEEDLEMAN

While some high-tech companies got their start in garages, a new crop of business founders, including Nick Miller of Baltimore, is giving fresh meaning to the term “garage entrepreneur.”

Mr. Miller co-founded Parking Panda Corp., a three-person company that helps city dwellers make money by renting their garage, driveway or other property to people looking for parking spots. Many people can fit another car, or even two, into their drive, he says, especially if they can tuck their own car into the garage.

Aspiring parking landlords, typically located in neighborhoods where parking is costly or hard to find, can list their space on the company’s website, along with price and availability. Then, they can use social media, such as Facebook and Twitter, to advertise their parking real estate.

The 24-year-old Mr. Miller says his website lists 2,500 spaces available in private driveways and garages and in commercial parking facilities in Baltimore and Washington, the two cities where it currently operates. The company makes money by taking a cut of the rent.

His and a handful of other parking start-ups are an offshoot of house-sharing services such as AirBNB, and car-sharing services like Zipcar, which claims to be the world’s largest car-sharing service.

Such “sharing” businesses are spreading rapidly, in part because they are so easy to replicate, and have attracted some high-profile investors, says Andrew Zacharakis, a professor of entrepreneurship at Babson College in Wellesley, Mass. Last year, Wheelz Inc., a year-old car-sharing service that operates on three California college campuses, landed an initial $2 million investment from a group of angel investors that includes several Facebook executives. It plans to expand to a fourth college campus later this week.

The new parking entrepreneurs hope to develop a niche in what the National Parking Association, a Washington-based trade group, estimates is an $18 billion-a-year U.S. parking market. Their services generally take cuts of 15% to 20% of each rental.

“It’s partly a land-grab situation,” says Ulrich Quay, managing director of BMW i Ventures LLC, a new venture fund from BMW AG

that recently invested an undisclosed amount in U.K.-based ParkatmyHouse Ltd. The six-year-old driveway-sharing service is expected to debut in the U.S. next month.

Studies show that drivers in the U.S. spend an average of eight minutes cruising for city parking, mainly so they can find a space free or at the lowest price possible within the shortest distance of their destination, according to Donald Shoup, a professor of urban planning at the University of California, Los Angeles. He estimates that hunting for parking is responsible for about 30% of traffic congestion.

Overall, there are more than 40,000 paid parking facilities in the U.S., but they aren’t necessarily convenient or affordable for everyone.

Last year, Katie Ott, tired of circling the blocks around Chicago’s Wrigley Field in search of parking for Chicago Cubs games, decided to search ParkWhiz.com. She found one private driveway space open for as long as nine hours at a price of $35.

Ms. Ott, an enrollment-benefits manager for an insurance company, entered her credit-card number online, and was charged the fee upfront.

On game day, she says, she simply left her silver Toyota Camry hybrid at the designated address, before joining friends at a restaurant.

As more players enter the field, however, competition may make it harder for the new parking services to succeed. “You have to do millions of these transactions to make it worth your while,” says Prof. Zacharakis, adding that it would be difficult to discourage consumers from listing their parking spaces on multiple services.

Jeremy Smith, co-founder of SpotHero Inc., says driveway owners sometimes forget they have rented out their spaces, leaving renters without room to park, while others overestimate just how many vehicles they can accommodate. The company provides a phone number renters can call in such cases to find a last-minute alternative, or arrange for a refund.

Because the new operations are based on a “peer to peer” business model, “issues can arise that are out of your control,” says the 25-year-old Mr. Smith, who launched SpotHero in July 2011 as a driveway-sharing service for the Chicago market, but has since shifted its focus. It now lists mostly commercial parking spaces.

Since the Web-based businesses essentially manage the rental of driveways and other private parking spots, the owners don’t have to wait around at home for renters to arrive. Payments are automatically deposited into their bank accounts.

Homeowners could face liability if for example, a driver’s car is stolen while parked on their driveway, or if a driver hits a pedestrian while entering or exiting the rental space. Homeowners insurance policies generally “don’t cover business dealings,” says Rebecca Ross, a partner at Troutman Sanders LLP.

Mr. Miller, along with co-founder Adam Zilberbaum, launched Parking Panda from a start-up incubator that provided $25,000 in seed money. He says the company recently raised $250,000 from a group of angel investors and it expects to close soon on another $250,000 round of angel funding. He says the business plans to expand to Philadelphia, Boston, Chicago and San Francisco.

“We don’t use our driveway very much. We might as well make a couple of bucks,” says Mondiu Ladejobi, a 35-year-old information-technology professional in Baltimore, who recently started to rent out half of his driveway for about $8 to Ravens and Orioles fans seeking parking for games at nearby stadiums. He and his wife, he says, normally keep their cars in their garage.

Write to Sarah E. Needleman at sarah.needleman@wsj.com

The skies have been anything but friendly of late for United Continental Holdings (ticker: UAL), the world’s largest airline.

Two weeks ago, the carrier reported a hefty first-quarter loss of $448 million. Granted, some $162 million of that loss were one-time expenses arising from the continued cost of cobbling together the systems of United Airlines and Continental more than a year after their December 2010 merger. But the remainder of the loss—$286 million—largely was the result of glitches in United’s reservation and separate “yield management” systems. Reservation kiosks didn’t work for a time. Reservation agents were overwhelmed. Seats went unsold or were sold at too low a price.

All of this cost United dearly in terms of passenger revenues and profitability. Year-over-year growth in the all-important passenger revenue per available seat mile rose only 5.2%, compared with 14% for Delta Air Lines (DAL) and 8.2% for US Airways Group (LCC).

Yet the impact on United’s stock was muted following the April 26 earnings report. The shares, which closed Friday at $22.28, are down just 3% since the news, as Wall Street analysts were looking for a bigger first-quarter loss before special items. Also United is now trading at just 5.8 times the $3.86 a share in earnings that analysts are forecasting for this year and four times next year’s projections of $5.52. Most analysts have circumspect price targets for the stock of about $26, though Sterne Agee analyst Jeff Kauffman, who foresees a sea change in airline profitability afoot because of industry consolidation, has an 18-month price target of $38.

United has lots of potential despite its recent travails, due to its enviable route structure and global reach. It boasts strong and strategically located U.S. hubs in Chicago’s O’Hare Airport, Houston, New York/Newark, Denver, San Francisco and Washington, D.C.’s Dulles Airport. Moreover, United is a charter member of the Star Alliance, a formidable collection of cooperating international carriers including Lufthansa, Singapore Air, Air Canada, Japan’s ANA and Air China. This ensures that United can offer a seamless travel experience for high-yielding business customers despite relentlessly growing competition in the U.S. from Southwest Airlines (LUV) and Spirit, and overseas from carriers such as Cathay Pacific, a member of Delta’s Sky Team Alliance.

To be sure, a stock investment in United isn’t without risk, even at today’s low stock price. Airlines are hostages, though less so today, to jumps in fuel prices, which constitute about a third of their cost structures. This lay behind Delta’s recent decision to buy its own oil refinery.

But carriers have been able to raise fares sufficiently to counter some if not all of this risk. Thus the industry overall was able to make money in 2011 with oil prices averaging $100 a barrel, where in 2008 they bled red ink with similarly priced oil.

Likewise, airline consolidations like United’s are hellishly expensive and time consuming to pull off, coordinating fleet structures, maintenance systems, reservation services, frequent-flier programs, and labor contracts. If the company fails to jump through all these hoops, the promised synergies on both the cost and revenue sides may prove elusive.

In the latest earning release, United CEO Jeff Smisek insisted that United was now “on the steep backslope of” its own integration efforts. Hunter Keay, an airline analyst of Wolfe Trahan, observed, “People who are getting impatient with United’s integration problems must remember that it took Delta over 26 months from the time it took over Northwest in October of 2008 to iron out all the problems and fully realize the efficiencies and revenue gains from the deal. I think United will be able to wrap most of these problems by Labor Day.”

Yet the biggest hurdle United must mount to achieving a higher stock price remains investor perception that the airline industry is too vulnerable to Darwinian fare competition, chronic over-capacity, oil prices, and economic cycles to merit long-term investment. Truly, the industry has been a vale of tears for investors ever since it was deregulated in 1978 during the Carter administration. Scores of legacy airlines and start-ups have gone bankrupt since, and profits have been meager save for Southwest.

Yet a change for the better in airline dynamics seems to be taking place that bodes well for survivors like United, Delta and US Air. Industry analysts say the consolidation that has occurred in the industry in recent years has led to more pricing power in what is essentially a commodity product. Under this scenario, American Airlines, a relatively disruptive force leading up to its bankruptcy filing in late November, could eventually be swallowed up by US Air, leaving a big three with enhanced market power.

THE POST-2008 CREDIT CRUNCH has likewise helped the survivors by making the financing of start-up airlines virtually impossible. High fuel costs too are an impediment to new airlines, given the fact that the only planes available to them are gas guzzlers sitting in the desert. The economics just don’t work.

Maxim Group’s Ray Neidl also likes the cost discipline of the new generation of airline CEOs, including United’s Smisek, Richard Anderson of Delta and Doug Parker of US Air. “They aren’t afraid to cut capacity when warranted, drop unprofitable routes, pare operations at money-losing secondary hubs, and charge separately for food, drinks and legroom,” he notes. “For the first time in literally decades, airline managements like United are focused on metrics like return on invested capital rather than just fleet expansion and boosting market share whatever the market consequences.”

To wit, U.S. airline domestic seat capacity has dropped 12.2% in the past four years with United and Delta leading the charge among the majors with drops of 18.8% and 14.9%, respectively (see chart), according to Daniel McKenzie of Rodman & Renshaw. Reduced capacity leads to full planes, as frequent travelers know.

Sterne Agee’s Kauffman claims that the recent changes in the airline industry promise to transform it from a destroyer to a generator of capital. The railroad industry negotiated this tricky transformation some 20 years after its deregulation in 1980, attracting investors like Warren Buffett, who spent more than $26 billion buying Burlington Northern in 2010. The rationalization of the airline industry has taken longer, only because the romance of owning an airline has lured so many besotted newcomers and the legacy airlines came out of regulation with such bloated fixed-cost structures that took years to unwind. “You couldn’t give away railroad stocks 15 years ago, just like investors shy away from airline stocks today,” Kauffman says. “But that situation will change for the likes of United, Delta and US Airways.”

The U. S. airline industry seems well on its way to becoming an oligopoly, which will gladden the hearts of investors, if not the flying public.

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