If you worked your whole life while dreaming of being your own boss, you might be thinking about buying a franchise in retirement. For many people, it is hard to stop completely when they retire, and buying a franchise can seem like the perfect retirement project.
Not only do you get to be your own boss, but you get to do so with the support of an established franchise system. You also get to use a well-known trademark—so you can hit the ground running instead of trying to build a recognizable brand. But there are risks involved as well, and if you are thinking about buying a franchise in retirement, it is important to carefully consider these risks before moving forward. National franchise lawyer Jeffrey M. Goldstein explains:
7 Important Legal (and Financial) Considerations for Buying a Franchise in Retirement
Buying a franchise at any stage in life requires careful planning and a clear understanding of the risks involved. But, if you are thinking about buying a franchise as a retirement project, some of these risks—and particularly those that are financial in nature—can be magnified. All franchisees face the possibility of failure, and while younger franchisees will have the opportunity to rebuild their nest egg if they need to, this isn’t necessarily the case for franchisees who are already in retirement.
Of course, with age comes experience, and this is something that you will have working in your favor. As a retiree, you will have the benefit of decades of hindsight. Yet, owning and operating a franchise is unique from any other type of business endeavor or employment, and no matter how much experience you have, there is no guarantee that your franchise will succeed.
When buying a franchise, making informed decisions is one of the keys to mitigating your risk effectively. With this in mind, here are seven important legal (and financial) considerations for buying a franchise in retirement:
1. How Will You Finance Your Franchise in Retirement?
First, how will you finance your franchise in retirement? While some people use their retirement savings to buy their franchise without taking out a loan, this approach can be risky—and it gets riskier the older you are. There are several financing options for first-time franchise buyers, and it is worth carefully considering these options before deciding how you will move forward with your purchase.
As a related financial consideration, it is also important to ensure that you have an alternate source of income during the initial stages of your franchise ownership. Most franchisors recommend in Item 7 of their Franchise Disclosure Document (FDD) that franchisees have six to twelve months of financial reserves. If your franchise isn’t profitable, how will you manage your personal finances during your retirement? Do you have adequate retirement savings to live off of the interest? Or do you need to consider other options?
2. How Much Involvement Are You Prepared to Have in the Franchise’s Day-to-Day Operations?
Owning a franchise means different things to different people. While some people envision themselves being behind the counter or constantly on the phone with customers and prospects, others are more interested in managing their investment from a bird’s eye perspective.
Both options are equally viable, it is just important to make sure you choose the option that is right for you. While many franchisors allow their franchisees to hire managers, some prefer owner-operators—so this may be something you need to keep in mind as well.
3. What Are the Franchisor’s Termination and Non-Renewal Rights?
One of the biggest risks associated with buying a franchise is losing your franchise rights. It takes time to turn a profit as a franchisee, and if you lose your franchise before it has become profitable, you could find yourself facing substantial financial losses in retirement.
As a result, when going through the buying process, it is important to hire a franchise lawyer to review the Franchise Disclosure Document (FDD) and franchise agreement. Your lawyer can thoroughly explain the risks involved, and your lawyer can negotiate for appropriate termination and non-renewal protections if necessary.
4. Does the Franchise Agreement Include a Provision for “Lost Future Royalties”?
Along with oppressive termination and non-renewal rights, many franchise agreements also include provisions for “lost future royalties.” If your franchise agreement includes one of these provisions and you lose your franchise before the agreement’s term expires, you will be required to pay the royalties you would have paid had you been able to remain in business.
5. What Are Your Territorial and Marketing Rights and Restrictions Under the Franchise Agreement?
In many cases, what franchisors advertise as territorial rights are actually territorial restrictions. When buying a franchise, you need to ensure that you clearly understand both: (i) where you can operate and promote your business; and (ii) where the franchisor and other franchisees can operate and promote their businesses.
6. What Will Happen if You Get Into a Dispute with Your Franchisor?
As a retiree, the last way you want to spend your time (and money) is by litigating with a franchisor. This can become even more time-consuming and more expensive if you are required to litigate (or arbitrate) in the city where your franchisor’s headquarters are located. While these types of franchisor protections are rarely negotiable, it is important to acknowledge the possibility of litigation (or arbitration) and ensure that you are prepared to go through this process if necessary.
7. Are You Prepared for the Long-Term Investment of Franchise Ownership?
Finally, when buying a franchise, it is important to view the franchises as what it is—a substantial long-term investment that requires daily attention. If you’re prepared for this, that’s great, and you may be ready to move forward. If you’re not prepared for this, it will be important to think long and hard about your decision, as investing in a franchise without the requisite commitment to its long-term success can prove to be a costly mistake.
Discuss Your Franchise Opportunity with National Franchise Lawyer Jeffrey M. Goldstein
Are you thinking about buying a franchise in retirement? If so, we encourage you to contact us for more information. To discuss your franchise opportunity with national franchise lawyer Jeffrey M. Goldstein in confidence, please call 202-293-3947 or request a free initial consultation online today.