When looking into purchasing a franchise it’s a good idea to investigate its background with a healthy dose of skepticism. It can be easy to get caught up in the hype of glossy brochures and promises of quick profits, but the reality is that franchisors and their representatives are selling a product and it’s in their best interest to dress it up as attractive as possible. Here are a few areas where you should take a second look in franchise agreements and contracts:
Claims of Earnings
This is the dollar amount a franchise company provides in their Financial Disclosure Document (FDD), and which can sometimes be very different from the amount quoted to you by a sales person, consultant or broker. It’s important to find out where these numbers are coming from, as some companies may have differing methods of calculating the average gross or net revenues. Some companies may divide their franchises up into top, middle, and bottom earners and then report on separate earnings for each section instead of averaging them out as a whole. Also, some companies calculate their earnings as a gross profit instead of net, which shows a profit number prior to expenses and taxes, which can significantly change the end result.
Any franchisor who is painting pictures of too-good-to-be-true training, marketing support and ongoing guidance should probably raise a red flag. Check the contract to make sure that everything your franchisor is offering is spelled out to the letter on paper. They can woo you with words, but unless it’s in writing you could be out of luck. Equally, you should check for the terms in your contract to see what it takes to terminate your relationship with the franchisor and sell the business. Some owners will have you sign a non-compete clause while others will even arrange it so that only they are allowed to terminate the contract, leaving you with a business you do not want any more. Make sure you go over all contracts with the help of a franchise lawyer to make sure you don’t get fooled by false promises or hidden pitfalls.
If you have spoken to the franchisor and say you are interested in getting to know about the experiences of a few of their current franchisees, they may provide you with a list of numbers to call. It’s possible that this is a legitimate and impartial but it is also possible that these names have been chosen because they are guaranteed to give a positive report and not provide you with the real details of the operation. A better way to find some reliable sources of information is to look on the FDD and find the list of franchise owners and their phone numbers. Call several of these numbers on top of the contacts the franchisor has provided and see if you get a consistent result.
Talking to area owners
Another thing to be wary about is speaking with other franchisees within the organization that may be near your own territory. It is possible that the thought of a new franchise so close to their own will make an owner feel threatened, and compel them to give out false information about the state of their business to discourage the competition. Try and talk to a sampling of franchise owners from a wide area to get a real sense of what is going on with the company.
Following the trends
Yes it can look promising to jump on the bandwagon when you see the latest fad sweeping the nation, but beware the perils of a fickle consumer. It’s generally better to work within a proven market that has had staying power for several years so that you don’t risk your savings on something that may not last more than a season or two. Do your research and try to envision where your prospective company was five years ago, and where it will be in five or even ten years down the line. If you can’t picture it, then it’s not worth the gamble.
Next Steps in the Transaction Process
When and if you decide to proceed, here are some key items you will want to cover with your future franchisor and franchise lawyer:
Get it in writing!
Check and see if you have made any verbal agreements with the participating parties that you are not seeing within the final contract, or you think have not been adequately covered. Once you’ve signed on the dotted line, it could be difficult to make the others step up and keep any promises you don’t have down on paper.
Know your obligations
You will want to make sure it is spelled out explicitly what each individual will be responsible for when opening and running your business. Will you as an individual have to execute the contract or are you allowed to assign the business to an existing corporation you own. Also, will there be any restrictions placed upon others regarding employment, ownership, or partnerships with other highly competitive franchises?
Renewing the license
If you are relying on the fact that you will be able to renew your franchise license once your initial contract expires, you will want to look into whether any restrictions can be placed upon this renewal. If you lose a lease or fail to reach certain performance milestones, can you lose your right to continue on with your business?
Know your territory
Has a location already been selected for your business, and is it in an area you think will prove beneficial? Will you be allowed to relocate if your lease expires or your business is performing poorly in a certain area? And, is there an agreement set up so that you are restricted from expanding into certain territories because of overlap with other existing franchisees?
You will want to check and see if there is a provision within your contract that tells you when and under what circumstances you are allowed to terminate your franchising contract and move on, and what consequences you will have to face for early termination. Also, who has the ability to terminate your contract, and under what circumstances?
Can I choose my own suppliers?
With certain relationships you can also be locked in with a supplier and unable to source your own wares even though you may be able to find cheaper, higher quality options available to you. Find out what restrictions will be placed on you in terms of inventory, and if you are able to source alternate brands or types of product from various suppliers.
Can I sell?
Find out what restrictions will be placed on you should you wish to sell or transfer over ownership interests to other owners. Will your partners have the right to stop such transfers from taking place, or have a say in who you are selling your business to?
Recommended Books on Franchising
Dwayne R. Nawrocki works with My Franchise Law helping individuals starting up a new franchise or even those who are currently in a franchise agreement. http://www.myfranchiselaw.com/
- What is Franchising?
- Researching Franchise Opportunities through Franchise Exhibitions
- How to Raise Money to Finance a Franchise
- Knowing the Do’s and Don’ts in Buying a Franchise
- Buying Your First Franchise