With concerns about climate change, habitat loss and other environmental threats regularly garnering headlines, we are seeing a resurgence in environmentally friendly businesses and business practices. A recent study found that more American consumers are willing to pay premiums for sustainable products than they were a few years ago, and we are also seeing an increase in sustainability-focused franchise opportunities. Does this mean that now is a good time to consider an environmentally friendly franchise? Learn about some key considerations from national franchise attorney Jeffrey M. Goldstein.
5 Special Considerations for Purchasing an Environmentally Friendly Franchise
There are several important factors to consider when contemplating an environmentally friendly franchise opportunity. While this includes all of the considerations involved in buying a franchise generally, it also includes considerations that are unique to targeting a sustainable franchise. Some examples of these special considerations include:
1. Does the Franchise Concept Offer Value Beyond Eco-Friendly Branding?
If you are considering a franchise opportunity because of its sustainability, it will be important to ensure that the franchisor’s eco-friendly branding is more than just window dressing. In an effort to cash in on environmentally minded consumers’ willingness to pay more for sustainable products, some franchisors are focusing on branding without focusing on much else. When buying a franchise, you need to ensure that you are getting adequate value for your initial franchise fee and monthly royalties—because if you don’t, your chances of success will be limited.
2. Will Your Customers Care About Sustainability?
It is also important to assess whether your customers will care about sustainability. Even if you are passionate about the environment, if your customers aren’t, you may find it difficult to build a sustainable business. Geographic location, demographics, and the specific products (or services) your franchise offers will all play key roles in determining whether your priorities and your customers’ priorities align.
3. Is the Franchise Really Environmentally Friendly?
Another important factor to consider is whether the franchise is really environmentally friendly. Beyond the window dressing considerations discussed above, it is important to ensure that your franchisor can substantiate its environmental claims. Not only is this important for ensuring that you are able to confidently promote your franchise’s sustainability, but it is also the law. If a franchisor doesn’t have data to back up its sustainability claims, this is a major red flag that should cause you to seriously consider other franchise opportunities.
4. How Much Authority Does the Franchisor Have to Make Changes in the Future?
Just because a franchisor is committed to sustainability now, this doesn’t necessarily mean that the franchisor will be committed to sustainability for years to come. If your franchisor loses interest in environmental friendliness, will it be able to make a fundamental shift in the franchise system’s direction?
There is a good chance that the answer to this question is “Yes.” Franchisors routinely reserve broad rights to modify and update their systems in their franchise agreements. Even if the purpose of this type of provision isn’t to allow for a departure from sustainability, this doesn’t necessarily mean that your franchisor won’t take advantage of its reservation of rights in the future.
5. Are There Additional Costs for Environmental Friendliness (and Are They Worth It?)
Just as many businesses charge premiums for sustainable products, many franchisors charge premiums for their environmentally friendly franchise opportunities. If you will be paying a premium for a sustainable franchise, are the additional costs worth it? Keep in mind that franchisees often have very narrow margins already. If your royalty rate is above average, or if you are required to buy expensive branded products from your franchisor, this could make it even more difficult to find success as a franchisee.
Additional Considerations for Pursuing Any Franchise Opportunity
Along with these considerations that are unique to environmentally friendly franchise opportunities, prospective franchisees who are contemplating sustainable franchises must address all of the considerations involved in buying a franchise generally. Some examples of additional key considerations include:
- Total Initial Investment – Regardless of any premium you might be paying for a sustainable franchise, it is important to carefully consider your total initial investment. The more you invest, the more you have to recoup before you can achieve profitability—and the more you stand to lose if your franchise is unsuccessful for any reason.
- Deadline to Open – Franchise agreements typically include a strict opening deadline. If you miss this deadline, your franchisor can terminate your franchise before you open for business. While this might sound unlikely, it does happen, and your franchisor could have another prospect waiting in the wings.
- Initial Term and Renewal Rights – It will take time for your franchise to become profitable (if it becomes profitable); and, with this in mind, it is important to make sure that you are comfortable with the initial term of your franchise agreement. You will want to make sure you have adequate renewal rights as well—so that your franchisor cannot take your franchise away from you if it wants to operate your location itself or insert a substitute franchisee.
- System Size, Location and Growth – Emerging and established franchise systems both offer advantages and disadvantages. When evaluating franchise opportunities, it is important to consider what the franchisor’s current system size, location and growth mean for your prospects of success.
- Termination Rights and Post-Termination Obligations – Termination rights and post-termination obligations are key franchise agreement provisions as well. Not only do you need to make sure you know when your franchisor can issue a notice of termination, but you need to make sure you understand all of the implications of termination as well.
Again, these are just examples. Making an informed buying decision requires thorough due diligence, careful financial analysis, and a thorough review of the Franchise Disclosure Document (FDD) and franchise agreement. If you would like to know more about the considerations involved in buying an environmentally friendly franchise, contact us today.
Discuss Your Environmentally Friendly Opportunity with Franchise Attorney Jeffrey M. Goldstein
To discuss your environmentally friendly opportunity with franchise attorney Jeffrey M. Goldstein, call us at 202-293-3947 or contact us online. We will schedule your free initial consultation with Mr. Goldstein at a time that is convenient for you.
