A franchise is a major investment. It’s important to carefully investigate the opportunity.
A common misconception is that franchises are really “turnkey” operations. Purchasers think that they just “buy” the franchise and it runs itself. This is incorrect. It’s important to clearly understand what you are buying, how hard you will have to work, and what income is realistic.
Advantages of buying a franchise include:
- Quick startup
- Help with site selection
- Brand name and recognition in the marketplace
- Training and support
- Customized accounting system
- Exclusive territory
- Marketing assistance
- Access to markets and suppliers
Disadvantages of buying a franchise include:
- Up-front fees (substantial initial investment required)
- Ongoing fees (usually royalty payment is a percentage of revenues)
- Fees for marketing and related services
- Restrictions on activities (you can only offer approved franchise products and services)
- Monitoring (the franchisor monitors your books, bank accounts and operations)
- Termination criteria
- Renewal requirements and fees
- Restrictions on transfer
"Buying" a franchise is legally complicated.
As a franchisee, you pay money for the right to use the franchisor's trademarks, systems and methods. Many franchises are legitimate and successful.
Unfortunately, there has been a history of problems with franchises. As a result, franchising is heavily regulated at both the state and federal levels.
The legally required franchise documents are intended to provide full disclosure to the prospective purchaser. In reality, the franchise documents are voluminous, full of legalese, extremely one-sided in favor of the franchisor, and packed with restrictions and fees.
Here are some tips to evaluate a franchise opportunity
1. Check to see if there are lawsuits against the franchisor.
Litigation is required to be disclosed in the franchise documents. This will give you important information about what’s gone wrong for others.
2. Talk to/visit existing franchise owners.
There should be a list of existing franchise owners in the franchise documents.
You can stop by and visit as a customer, and observe their operations.
You can also call up and ask questions, such as:
- Are you satisfied?
- Did you receive the support promised?
- Were there any surprises?
- Have there been any problems?
- How were the problems resolved?
- Are you making the money you expected?
- Can I visit and observe your operations?
3. What are the fees?
Franchise terms vary. It’s important to understand the fees.
Make a list of fees:
- What’s included with the initial franchise fee?
- What’s the royalty? Is it a percent of “gross” or “net” sales?
- Is the royalty a fixed percentage or does it decline over time?
- Are there service fees? Training fees? Marketing fees? Advertising fees?
4. What’s your territory?
Draw a map with clear boundaries:
- What is your defined geographic territory?
- How close can another franchise like yours be located relative to your location?
5. What’s your competitive advantage?
- What sets this franchise apart?
- Does the franchise include key technology or methods?
- Can it be easily copied?
6. What are the restrictions?
- Are you limited as to what you can sell?
- Are you required to buy from specific suppliers?
- What are the reasons for termination?
- What is the scope/term of the non-compete?
- What are the requirements for renewal?
- Can you transfer ownership?
Bottom Line:
Buying a franchise may or may not be a good choice for you. Before signing a franchise agreement, check it out carefully and make sure you understand what the documents say. The advice of a business attorney knowledgeable about franchises can help you understand the legalese and make an informed decision.
NOTE: Information provided is intended as a broad, general overview and is not legal advice.
© Copyright, 2009, Jean Sifleet. All rights reserved. Used with permission.
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About This Author:
Jean D. Sifleet, Esq. CPA, is the head of the Business Practice Group of Worcester. For practical information, check out Jean's articles and books which are featured on SmartFast.com.
