Tips on Buying a Franchise
If you are thinking of buying a franchise, there are a few things that you should know to make the process a little bit easier. As a lawyer representing both franchisors (the sellers of franchises) and franchisees (the buyers), I have seen hundreds of franchise offerings and can offer some advice based on my experience.
Are you an entrepreneur?
You may think I ask that because franchisees should be entrepreneurs. Actually, it’s the opposite. To be a successful franchisee, you must be able to operate within a system of fixed rules. The primary reason to buy a franchise, rather than start a business from scratch, is to take advantage of someone else’s experience. Individuals who want to do things their own way may have trouble fitting into a system. The most successful franchisees are people who operate the business according to the system. Now, that doesn’t mean you shouldn’t be motivated or a self-starter. Those are generally necessary qualities in a franchisee. But if you are the type of individual who is always looking to buck authority and push the envelope, you probably should think twice about being a franchisee. Uniformity is important to the success of most franchise systems and franchisees who insist on doing things differently are not going to gain favor with the franchisor or other franchisees. Now, that doesn’t mean you can’t suggest innovations and improvements for the betterment of the system, but franchisees who always think their way is better probably shouldn’t be in a franchise system.
How do you choose a franchise?
Once you have determined that your personality fits being a franchisee, the search begins. There are many ways to find potential franchises. You may know what type of business you would like, based on past business experience, or you may have no idea. One way to find franchises is through web searches on the Internet. Any legitimate franchise company should have a website that can give you some idea of their business. There are also franchise expos held throughout the country that feature franchise companies with sales personnel on site to entice you in their franchise business. You have to be careful with these because the expo promoter is often just leasing space to the franchise sellers and they may appear to be better opportunities than they are. A good rule is to never commit to anything at a franchise show, and especially if they claim to have specials that you must take advantage of “today.” A legitimate franchise company will not use any pressure tactics. Another source is local or online bookstores that will often carry franchise guides you can purchase that list many companies with an outline of their franchise opportunity. And another way to search is to make inquiries at local businesses you like who are franchises. Finding the franchises is easy – determining which is right for you is the hard part.
When you make inquiries at a franchise company, you will usually either be sent the offering materials or an application to see if you are financially qualified. Although a few banks and the Small Business Administration (SBA) will loan money to purchase a franchise, they will usually only do so for certain very established systems and you will normally be required to pay cash for a portion of the initial costs. If you complete an application and receive approval, you should receive the company’s offering materials in the form of a Franchise Disclosure Document (FDD) that is required by the Federal Trade Commission. If a company does not furnish you with an FDD or asks for any fees without doing so, I recommend you go no further with them. Once you have received and reviewed an FDD, you can determine if you have interest in the particular franchise. The FDD will have information about the costs involved, the type of business you would operate and the obligations of both the Franchisor and you. It will also have audited financial statements of the franchisor in most cases which are important to see if the company is financially stable. All of the agreements that you would be asked to sign must also be included and information on current and past franchisees must also be in the FDD.
What do you do once you have decided you like a particular franchise?
Once you have found a franchise that you think you would like to purchase, and have reviewed the FDD, it’s time to hire a franchise lawyer and do your due diligence. At this point, you need the experienced eyes of someone who has reviewed and negotiated franchise purchases to guide you through the process. Most franchise agreements are written very one-sided in favor of the franchisor. But if you are going to invest in a business that will be governed by these agreements, you must understand what you are getting into and many times provisions can be negotiated to make them fair for both sides. There are good reasons why many of the provisions that may seem overly in favor of the franchisor are there, because a franchise system should have controls to require the franchisees to perform in such a way that benefits the other franchisees, but there are other provisions that could create an undue hardship on the franchisee in certain circumstances and should be changed. You should have the assistance of someone familiar with these contracts and who can explain to you the downside of agreeing to them. I will not only help you with these items, but provide assistance with how to do your due diligence on the business itself. In addition, like any new business, you will want to decide whether to own it personally or through an entity, and what type of entity works best for you. Many franchises also involve leasing a location and constructing either a free-standing building or finishing or remodeling space in a shopping center. It is important to know what the costs and time will be in your local area before agreeing to purchase a franchise.
What does a potential franchisee get from an experienced franchise lawyer?
Although many lawyers may say that they can review your franchise documents, I have found that unless the lawyer has actual experience in franchise offerings, you may not get what you need. The franchise relationship is a long term commitment on both sides and it is important to make certain that you are setting the relationship up in a way that gives you the best chance for success. When I represent a potential franchisee, I will review all of the documents, including the FDD and all agreements and prepare a written report on the franchise. I will then meet with you in person to review the report and advise you on any provisions that are onerous and that could affect your ability to be successful. I will advise you on how to perform due diligence by providing you with questions for the franchisor as well as current and former franchisees. And, if you like, I will represent you in negotiating the changes to the franchise agreement that you agree are needed. I can also advise you on the type of entity you should form and the costs involved and assist you in forming it. It amazes me how many people purchase a franchise and commit a large amount of money to the business without proper legal advice. I often represent these people a year or two into their agreement when there is a problem and most times it is a problem that would have been prevented with proper counsel before the purchase. And it almost always costs much more to fix the problem at the later time. If you are looking to purchase a franchise, I would be happy to discuss representing you so that you can truly get the deal you think you are getting.