Can you get wealthy by owning franchises? Undoubtedly, the answer is yes. Some franchisees are able to make significant sums of money, and they build careers as serial franchise owners. According to an article on Forbes.com, the largest restaurant franchisee in the world, Greg Flynn, has nearly $2 billion in annual revenues. The article goes on to list nine other franchisees that bring in over $500 million per year.
However, for every Greg Flynn, there are countless franchisees who is struggling to make payroll or pay rent. For each of these struggling franchisees, there is another franchisee who has already failed. According to the Small Business Administration (SBA), franchisees fail at approximately the same rate as independent business owners, which means that roughly half of all franchises go out of business within the first five years.
Also, keep in mind that Flynn owns 800 restaurants, has relied heavily on institutional capital, and has a team of professionals working for him behind the scenes.
But, let’s assume that you are planning to start small, and that you don’t need to make hundreds of millions in order to consider yourself wealthy. What do you need to do in order to make your first franchise a success? Aside from having a sound financial plan, you also need to address the legal issues involved. For example:
1. Protect what you own currently.
When you own a business that is open to the public, there is a chance that you will get sued. If you get sued personally, you could lose everything you have worked to accumulate thus far. Forming a corporation or limited liability company (LLC) to own your franchise can help protect your personal assets (not to mention, it is a requirement under many franchise systems).
2. Do your research.
Not all franchise opportunities are alike. Some franchisors have more experience than others. Some have more-recognized brands, and some have hundreds or thousands of franchisees worldwide. What type of franchise is right for you? Do you want to buy into a well-established franchise with a trademark that is instantly recognizable to the majority of the population; or, do you want to be one of the first franchisees in a growing franchise system?
Reviewing a franchisor’s Franchise Disclosure Document (FDD) can provide a wealth of information, including information about terminated franchisees and potential litigation. To get the most out of the FDD, you should have it reviewed by an attorney who focuses his or her practice on representing franchisees.
3. Negotiate the franchise agreement.
Franchise salespeople will often try to get franchisees to sign their franchise agreements without negotiating. The reason for this is twofold: (i) they want to make a sale; and, (ii) they know that if the franchisee looks at the agreement closely, he or she will see that it contains numerous unfair and heavily one-sided provisions.
Negotiating your franchise agreement can be critical to your long-term success. From securing added flexibility to address changes in your local market to helping solidify your right to renew, the more you do to protect yourself, the better your chances will be to maximize your profit potential.
For more information about the risks involved in buying a franchise, you should discuss your opportunity with an experienced franchise attorney.