Video Transcription

We’ve been discussing the different, general types of costs that a franchisee has to incur and that he or she must look at before purchasing a franchise. We looked at initial fees or costs, the fixed fees, we’ve looked at ongoing royalty payments and we’ve looked at advertising fees. We really haven’t examined them, but we’ve identified them. With regard to restrictions on a franchisee, those are crucial. To examine those is part of your due diligence. The first issue would regard supplier’s restrictions from whom you can buy.

The most potent and deadly restriction is a franchisee has to buy directly from a franchisor who, all of a sudden, goes in the business of manufacturing and producing the service for the franchisee to use in selling his product or service to customers. I’ve seen many cases where the franchisor has enough difficulty selling franchises and running them, which is its business, never mind manufacturing or advising franchisees with a regard to how to market their services and provide services to their franchisees. So, that’s something you need to take a look at.

A similar issue but not as bad, is where a franchisor requires a franchisee to purchase from one, specific supplier or a second specific supplier. And everybody knows the concept of a monopoly. It’s not a monopoly in a antitrust sense, but it’s still one individual who’s selling to another individual, and the purchasing individual is not allowed to buy it from anybody else. For the purchasing individual, it doesn’t matter if you call it a monopoly or not, he’s still gonna pay, most likely, inflated prices. So, that’s something a franchisee needs to determine right upfront.

There’s also restrictions that could relate to the goods and services that you can offer for sale. So, if you deal with brake repairs for cars in the retail industry, and you try to move to doing mufflers, there may be a restriction by the franchisor that you can only do brakes and you can’t do mufflers, even though you have empty space, you have excess capacity and you could service that other retail sale. You need to look at that, as well. Many franchisees figure, “Hey, I’m doing cars. I can do brakes, I can do mufflers, I can do whatever deals with a car,” and that’s absolutely not true. You can be terminated for that, as well. And when I say you can be terminated for that, as a franchisee you can most likely be terminated for almost anything. But I’ll put that to the side.

There may be restrictions on customers, so that you’re only allowed to sell to institutional customers, for instance, and not end parties or the consumers themselves. It could be the other way around, where the franchisor sells to corporate accounts or larger customer accounts. So, that’s something you need to look at in the fine print. And if you have an advisor, usually an attorney on these particular issues, it would serve you well when doing your due diligence.

There could also be an issue as to where you sell your goods and services, such that an exclusive territory, and people understand what that is, in general, but an exclusive territory can cut both ways. So, there may be a restriction on where you can sell, personally. So, if you’ve got an area that’s adjacent to yours and it looks like you’ve got an in with that particular geographic area, you may be restricted from selling there given that your exclusive territory cuts that area out. And this may be the case, even where there’s no adjacent franchisee. The franchisor, in that case, would say, “Hey, you wanna sell outside your exclusive territory and we don’t have another franchisee there? You have to pay us an additional amount to sell in that area.” And that happens somewhat frequently, as well.

There’s also restrictions that have come up in the last couple weeks, for instance, in my cases, where there’s a restriction on internet advertising where the franchisee is not permitted to have its own website. And, as everybody knows, websites are, for most business nowadays, are crucial, and they can very much assist a business in sales and things of that nature. And being prohibited from having your own internet site is a big thing. It may not have been 10 years ago, 5 years ago when some of these agreements were drafted, but for people signing a new agreement or dealing with renewals, it’s certainly something that a franchisee has to look at.

I’d like to, next, move to the issue of training. Training is another issue that is part of due diligence a franchisee needs to look at. We’ll talk about, in a little bit, whether the franchisee has the aptitude or the ability to operate that particular kind of franchise or business, in general, and that’s something a franchisee needs to consider, as well. With respect to training, there are many franchisees who go into a particular franchise and they have no experience in that particular industry, or product or service. A franchisor, almost always, and perhaps always, says that the franchisee can learn the particular skill or skill set to operate the franchise. And, as a matter of fact, the franchisor’s gonna provide the training. And that’s a common program that a franchisor will run through in selling its franchise.

There are several questions that I’ve written down that I think, that I know a franchisee needs to look at, in terms of assessing the training, the adequacy of the training, the cost of the training and the efficacy of the training. One thing is whether new employees are gonna be permitted to do the training. Now, this also goes to a cost issue. Franchisor may say, “We’re just gonna train the initial people.” And then, after that, you’ve got a $4,000 or $5,000 fee to train an additional person. A manager, it might be worth it, perhaps, given the revenues in the particular circumstances. But if you’re bringing in people who aren’t in a management capacity, that cost could add up. There are some franchisors who will pay that cost, very few. And franchisors are now looking for every clause in an agreement as a profit center. So, that cost could be substantial, and franchisees need to look at that issue, who’s gonna pay.

There’s also an issue as to how long the franchise sessions for training are gonna last. If you’re required to go three, four times a year, to use an extreme example, that’s gonna be a lot of time out of your business, out of your day, especially if you’re operating the business yourself. There’s the cost of transportation, the cost of meals, the cost of the hotels while you’re at the franchisor’s headquarters.

Thanks for being with me today. And if anybody has any questions, feel free to give me a ring. Thanks again.

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