College students are choosing entrepreneurship as an alternative to traditional career paths with increasing frequency. This includes pursuing franchise ownership. Several colleges and universities now offer franchising programs, and these programs are designed to help prepare students for the trials, tribulations and other day-to-day realities of life as a franchisee.
As these programs teach (or hopefully teach) their students, buying a franchise comes with several significant legal risks. In this article, franchisee attorney Jeffrey M. Goldstein discusses three risks that are of particular importance for students pursuing franchise ownership directly out of college.
3 Key Legal Considerations for Prospective Franchisees
Thinking about buying a franchise out of college? Here are three important legal considerations to keep in mind:
1. Once You’re In, You’re In
Once you sign a franchise agreement, there is no going back. While some states have franchise relationship and disclosure laws that provide outs for new franchisees in some cases, getting out is absolutely the exception to the norm.
So, once you’re in, you’re in. This means you need to be absolutely certain you are prepared to move forward. You need to have your financing in place, you need to have a plan for opening your franchise on time, and you need to be confident in your ability to succeed as a franchisee.
2. Franchisors Reserve Broad Rights to Modify Their Brands and Systems
While you will be bound to strictly adhere to the terms of your franchise agreement, your franchisor will enjoy a significant amount of flexibility. Franchisors almost universally reserve broad rights to modify their franchise agreements and operations manuals as they see fit. This is important to keep in mind during your due diligence, as you will want to try to discern whether there are any significant changes on the horizon.
3. The Costs of Franchise Ownership Can Add Up Quickly
In order to buy a franchise, you need much more than just your initial investment. You must have cash reserves on hand to cover your operating expenses and pay your staff (if any) as well. You should also be prepared to cover your living expenses without relying on income for your franchise for a minimum of six months. Between royalty fees, advertising fund contributions, and mandatory upgrades, the costs of franchise ownership can add up very quickly.
If you cannot afford to maintain your franchise, you will not simply be able to walk away. Your franchisor can declare you in default of your franchise agreement, and it can seek lost future royalties and other damages (unless you negotiate protections against these into your agreement). You will also likely be subject to post-termination competitive restrictions, which means that you won’t be able to start a similar business or reach out to your former franchise’s customers.
Request a Free Consultation with Franchisee Attorney Jeffrey M. Goldstein
While buying a franchise presents opportunity, it also entails several significant risks. If you are thinking about buying a franchise, it is strongly in your best interests to get advice from an experienced franchisee attorney. For a free, no-obligation consultation at the Goldstein Law Firm, call 202-293-3947 or request an appointment online now.