The U.S. Federal Trade Commission (FTC) recently published an article with five “myths” about franchise ownership. As we discussed in a previous post, two of these “myths” weren’t myths at all, but rather reflected fundamental aspects of the franchisor-franchisee relationship. As a franchise lawyer, it is disappointing to see the FTC get it so wrong—especially in an article that is intended as a free resource for prospective franchisees.
In light of the FTC’s recent article, we thought that we would publish a list of actual myths about buying and owning a franchise. If you are considering a franchise purchase, here is what you need to know:
Myth #1: You Should Trust Your Gut Instinct
Reality: Making an informed franchise buying decision requires careful evaluation of multiple franchise opportunities and an informed assessment of each opportunity’s potential.
Many people will tell you to “trust your gut” when it comes to making decisions about starting a business. But, the reality is that making an informed decision about buying a franchise is far more complicated. While you may be interested in owning a particular type of business, or you may even be drawn to a particular brand, this alone isn’t enough to justify the decision to move forward.
Rather than trusting your gut, you need to trust the information you gather during your due diligence. You should compare multiple competing franchise opportunities in each industry you are considering. Then, once you narrow down your options, you should work with a franchise lawyer to assess all pertinent legal considerations and ensure that you are making an informed buying decision.
Myth #2: Buying a Franchise is Easy
Reality: While franchisors’ sales representatives will make the buying process seem straightforward, you must be very careful to protect yourself during the process.
If you are a strong candidate for franchise ownership, franchisors’ sales representatives will want you to sign on. As a result, they will make the buying process seem as easy as possible. But, buying a franchise is a substantial and complex investment, and you need to treat it accordingly.
While buying a franchise might technically be as simple as signing the Receipt page of the franchisor’s Franchise Disclosure Document (FDD) and then waiting a couple of weeks to sign the franchise agreement, this is just one part of a multi-part process. From doing your due diligence to working with your franchise lawyer to negotiate key terms in the franchise agreement, there is much more involved.
Myth #3: The Franchisor Will Help You Get Ready to Open for Business
Reality: You are responsible for ensuring that you are ready to open. If you don’t open on time, you could lose your franchise.
During the buying process, the franchisor’s sales representatives will likely tell you all about how the company’s operations team will guide you step-by-step through the process of getting ready to open your doors. But, once you sign the franchise agreement, the reality could be very different. This is when many new franchisees learn a critical lesson about the franchisor-franchisee relationship: If it isn’t clearly specified in the franchise agreement, it probably isn’t going to happen.
From the time you sign the franchise agreement, you are responsible for your own success. While you may receive some training and some pre-opening support, you will be responsible for doing all of the legwork—and making sure you do it before your opening window expires. Some franchisors use the pre-opening period as a test: If you can’t get ready to open on time, they will terminate your franchise agreement and find someone else who can.
Myth #4: You Can Rely on the Franchisor’s System to Build a Successful Business
Reality: You must follow the franchisor’s system even when you don’t want to, and what is best for other franchisees might not be best for you.
When you buy a franchise, one of the things you pay for is the right to use the franchisor’s system. This includes the franchisor’s branding and trade dress, its product or service line, and its methods for building a robust and reliable customer base.
But, as a franchisee, you also have the obligation to use the franchisor’s system—regardless of whether you want to or not. As you grow your business, there will almost certainly be circumstances in which deviating from the franchisor’s strict standards will be desirable. In this scenario, you will have to choose between following the franchisor’s system and losing out on revenue or deviating from the system and risking loss of your franchise—which isn’t really a choice at all. In any case, following the system alone won’t be enough to build a successful business, and it will be up to you to find a way to succeed within the confines of the franchisor-franchisee relationship.
Myth #5: Owning a Franchise is Easier than Building an Independent Business from Scratch
Reality: Owning a franchise presents many challenges that starting an independent business does not.
Due to the ability to use the franchisor’s system and leverage its brand recognition, many people assume that owning a franchise is easier than building an independent business from scratch. But, owning a franchise presents its own unique set of challenges, and many people find these challenges are on par with those involved with launching a brand new concept.
As a result, before you go down the path of pursuing a franchise opportunity, you need to make sure this is the right choice for you. While buying a franchise can be a good investment, this requires the right set of circumstances. Choosing the right concept, doing your due diligence, and working with a franchise lawyer to review the FDD and negotiate the franchise agreement are all key steps toward maximizing your chances of success.
Request a Free Consultation with Franchise Lawyer Jeffrey M. Goldstein
If you are thinking about buying a franchise, we encourage you to contact us for more information. To request a free consultation with franchise lawyer Jeffrey M. Goldstein, call 202-293-3947 or tell us how we can help online today.
