5 Special Considerations for Purchasing a Business or Financial Services Franchise

Apr 19, 2019 - Blog by |

If your background is in finance, tax, marketing or business administration, owning a franchise may be compelling for a couple of different reasons. Not only could owning a franchise mean running and managing your own business, but it could also mean using your background and experience to help other individuals and businesses. Depending upon exactly what you are looking for, there are a variety of different franchise opportunities available in the business and financial services sectors. Of course, all of these franchise opportunities present different risks, and choosing the best franchise for your individual circumstances requires thorough due diligence and a careful assessment of the Franchise Disclosure Document (FDD) and franchise agreement. For prospective business and financial services franchisees, here are five special considerations to keep in mind: 1. Approved Products and Services For many people, one of the appealing aspects of buying a franchise is having access to an approved (and presumably well-vetted) list of products and services. However, as a professional service provider, this may not necessarily fit your goals. Will you be comfortable limiting your product or service offerings based upon what the franchisor allows? Might you feel hamstrung by not being able to offer a full suite of services based upon your personal background and experience? These are issues that could significantly impact your level of satisfaction as a franchise owner. 2. Professional Liability (Errors and Omissions) If you will be providing professional advice to individuals or businesses, you may need to factor premiums for professional […]

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What are the Risks of Signing a Franchise Agreement Without Legal Advice?

Apr 12, 2019 - Blog by |

When buying a franchise, you need to make several important decisions that can have lasting implications for you and your business. Among them is the decision of whether or not to hire a franchise attorney. With all of the startup costs involved, hiring a lawyer to review the Franchise Disclosure Document (FDD) and franchise agreement may seem like one area where you can save some money (after all, aren’t you just going to end up signing the franchise agreement anyway?). But, while this is a choice some prospective franchisees make, their decision is usually based on a lack of understanding of the services an experienced franchise attorney can provide. 5 Risks of Signing a Franchise Agreement Without Legal Advice Along with numerous other ways an experienced franchise attorney can help you make an informed buying decision, here are five key risks your attorney will be able to help you avoid: 1. Not Knowing What You are Signing Buying a franchise is a long-term investment, and a franchise agreement is a long-term, legally-binding contract. Once you sign, you are bound to comply, and the odds are that you do not have a way out that does not involve incurring substantial financial liability to the franchisor. Before you sign, you need to know what you are signing, and you need to make sure you are comfortable with the legal and financial risks involved. 2. Not Negotiating One-Sided Provisions of the Franchise Agreement Franchise agreements are almost universally heavily one-sided in favor of […]

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Franchisee Progress Doomed by Archaic Economic Thinking

Apr 5, 2019 - Blog by |

Problem: As discussed in more detail below, although it is possible to achieve some measure of success in furthering the short-run goals of franchisees through the formation of franchise associations, achievement of the long-run goals of franchisees will nevertheless remain elusive, as they have for the last 25 years. Until franchisee associations develop the ability to understand and use more correct, accurate and dynamic theories underlying franchise market forces, they will be nothing more than temporary dues-collection entities. To explain this pervasive misunderstanding more fully, below I briefly posit the existence of two prototypical market models. (Of course, the markets as defined below are not pure nor are they complete; I defined and created the two crossbreed models below only for illustrative purposes). Franchise Model with Inherent Conflicts and Distorted Incentives (“Conflicts Model”) The Conflicts Model is one that I argued previously covers the franchise context. To create this model for illustrative purposes I’ve chosen and combined certain elements of both the neoclassical and transaction cost economics (“TCE”) theories to identify myriad “inherent conflicts” in the franchise market (and between stakeholders). Again, the neoclassical model shows, inter alia, that there is an underlying inherent conflict between the two major stakeholders since they maximize different variables, sales and profits. The implication of this inherent conflict is that franchisors and franchisees, in naturally seeking to achieve and maximize different market goals, will calculate different optimization levels of the same market variables. I gave the example of how this shakes out in an […]

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6 Ways a Franchise Attorney Can Help Besides Reviewing Your FDD

Mar 29, 2019 - Blog by |

If you are thinking about buying a franchise, you have probably been told that you should speak with a franchise attorney. You have probably been told that a franchise attorney can help you understand the Franchise Disclosure Document (FDD) and maybe even help negotiate your franchise agreement. But, there are a number of other ways that a franchise attorney can help you during the buying process as well, including: 1. Comparing Your Chosen Franchise Opportunity to Competing Franchises When buying a franchise, most of the information you obtain about the franchise will come from the franchisor. You can (and should) speak to current and former franchisees during the due diligence process as well; but, even then, you are still only gathering information about the specific franchise you have selected. An experienced franchise attorney will be able to access competing franchise systems’ FDDs and franchise agreements, and use the knowledge gained from representing numerous other clients to help you make an informed decision. 2. Identifying and Evaluating Legal Risks Related to Your Chosen Franchise Opportunity Beyond simply summarizing the key provisions of your FDD and franchise agreement, an experienced franchise attorney will also be able to identify and help you evaluate legal risks that you likely would not be able to spot on your own. For example, while access to proprietary branded products may seem like a good thing, there are also risks involved in committing to the use of third-party products and suppliers. 3. Helping You Form a Limited Liability […]

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FAQs: What Do Franchisees Need to Know About Renewal?

Mar 22, 2019 - Blog by |

All franchise agreements expire. While the goal of buying a franchise is to build a sustainable business that generates profits for years to come, the reality is that many franchisees struggle to recoup their initial investment before their initial term expires. If the initial term of your franchise agreement is about to expire, what do you need to know about renewal? Here are answers to some frequently-asked questions (FAQs): Answers to Frequently-Asked Questions (FAQs) about Franchise Renewal Q: Can my franchisor refuse to renew my franchise agreement? In general, a franchisee’s “right” to renew is subject to a laundry list of conditions set forth in the franchise agreement. If you fail to satisfy any of these conditions by the date your original franchise agreement expires, then your franchisor may refuse to renew your franchise. State franchise laws provide protections against bad-faith refusals to renew in some cases. Q: What do I have to do in order to exercise my right to renew? In order to exercise your “right” to renew, you must satisfy all of the renewal conditions stated in your franchise agreement before your initial term expires. Minimally, this will likely mean curing any outstanding payment deficiencies, updating to current system standards, and signing the franchisor’s “then-current” form of franchise agreement. Q: Will I be required to sign a new franchise agreement in order to renew? In most cases, yes. Franchisors generally include execution of their “then-current” franchise agreement as a condition of renewal. However, while you may be […]

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5 Special Considerations for Buying a Hotel Franchise

Mar 15, 2019 - Blog by |

Hotel chains dominate the hospitality market, and some hotel chains are among the largest and most well-known franchised brands in the world. As a result, many prospective franchisees find the idea of owning a hotel to be a desirable one, and they believe that the substantial up-front investment will more than pay off in the long term. While this is certainly the case for some hotel franchisees, building and operating a successful hotel is a challenge even for the most-seasoned business owners. When you add in the costs and inherent challenges involved in operating under a franchised model, finding success as a hotel franchisee is far from certain. At the Goldstein Law Firm, in addition to representing prospective hotel franchise owners in franchise agreement negotiations, we also have extensive experience representing hotel franchisees in litigation with their franchisors. If you are thinking about buying a hotel franchise, here are some of the key risks to keep in mind: 1. Substantial Initial Investment Although many franchises can be launched with less than $100,000, building or renovating a hotel is generally a multi-million-dollar endeavor. While much of this initial investment is attributable to costs you would incur regardless of whether you were building a franchised or non-franchised hotel, you will still be required to pay a significant up-front initial franchise fee to the franchisor. In any case, before making such a significant investment, it is critical to ensure that you have taken appropriate legal measures to protect yourself as much as possible. […]

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Can My Franchisor Audit My Franchise?

Mar 8, 2019 - Blog by |

If you signed your franchise agreement without reading it carefully, you might be surprised to learn that your franchisor has a broad right to audit your franchise. Franchisors almost universally reserve this right; and, while audits are ostensibly intended to ensure that franchisees are accurately calculating their royalty fee and marketing fund contribution obligations, franchisors often use them as tools for establishing grounds for default and terminating underperforming or “difficult” franchisees. So, your franchisor has announced that it will be auditing your franchise. What do you need to know? Protecting Your Rights During a Franchise Audit 1. What Does Your Franchise Agreement Say? When faced with an audit, the first thing you should do is review your franchise agreement. What does it say about audits? Are there any restrictions on how frequently your franchisor can audit your franchise or how much advance notice your franchisor must provide? Can your franchisor hire a third-party auditor to inspect your books and records? What is the permissible scope of the audit? 2. Do You Have Anything to Worry About? Assuming your franchisor is within its rights to conduct the audit, your next order of business should be to conduct an internal audit of your own. Is it possible that you could have underreported your gross revenue—could you be at risk for being declared in default of your franchise agreement? If you have any concerns, you should come up with a plan to address them proactively before your franchisor has a chance to send […]

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Franchise Fees, Royalties, Marketing Fund Contributions…How Much Does It Really Cost to Own a Franchise?

Mar 1, 2019 - Blog by |

Buying a franchise is an investment. But, beyond your initial franchise fee (and potentially other startup expenses), as a franchise owner you are likely to incur a number of other ongoing costs that you would not have to pay as an independent business owner as well. So, how much does it really cost to own a franchise? Additional Costs of Franchise Ownership (vs. Owning an Independent Business) The following are all examples of fees and costs that franchisees may be required to pay their franchisors: 1. Initial Franchise Fee The initial franchise fee is an up-front, one-time payment that is typically due at the time of signing or within a specified period of time (such as 30 days) after signing the franchise agreement. Initial franchise fees vary from one franchise system to the next, but are usually somewhere in the range of $15,000 to $30,000. 2. Lease, Branded Products and Other Startup Expenses In some systems, franchisees may be required (or have the option) to lease their facilities from their franchisor, and they may be required to make an initial purchase of branded products and various other mandatory purchases as well. When leasing or purchasing from a franchisor or a designated supplier, it is critical to ensure that you are paying fair market value – which will not always be the case. 3. Royalty Fees Royalty fees are typically calculated as a percentage of the franchisee’s gross revenue, although there are some different royalty structures out there (such as flat […]

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A Franchisor is Refranchising. Should You Buy?

Feb 28, 2019 - Blog by |

While “refranchising” may sound like a unique and innovative concept, in reality all it means is that a franchisor has decided to sell its company-owned outlets to independent owners. Franchisors ranging from startups seeking to transition from company ownership to McDonalds and other global brands have undertaken refranchising campaigns with varying degrees of success; and, for prospective franchisees, buying an existing company-owned outlet involves some unique legal and business considerations. First and foremost, it is important not to lose sight of the fact that there is a reason why the franchisor has chosen to refranchise. If the franchisor doesn’t want to own its stores or restaurants, why should you? While there may be a reasonable explanation for the sell-off (such as unloading unmanageable overhead or capital expenses), as a prospective franchisee, you need to feel confident that you are not buying a sinking ship. Some other legal considerations for buying an existing company-owned outlet include: 1. Initial Investment Aside from the purchase price, you are still likely to face a sizable initial investment. Franchisors still typically charge initial franchise fees to “conversion” franchisees, and you may also need to fund remodeling expenses, upgrade costs, and other capital expenditures. You will likely incur some of the other startup costs listed in Item 7 of the Franchise Disclosure Document (FDD) as well; and, even though you are buying an existing business, you will still likely want to establish a sizable capital reserve. 2. Royalties and Advertising Fees When the franchisor operated the […]

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Is Buying Into a Startup Franchise Too Risky?

Feb 22, 2019 - Blog by |

According to a recent article on Forbes.com, approximately 300 new franchise concepts pop up every year. Of these, nearly a third (30.6 percent) sell zero or one franchise within their first four years of franchising, and less than half (42.2 percent) expand to 26 or more outlets five years from the issuance of their first Franchise Disclosure Document (FDD). So, is buying into a startup franchise too risky? Or, if the concept proves successful, can it provide the sweet spot that many prospective franchisees are looking for – a recognized brand and reliable system support without the intra-brand competition and impersonality of a behemoth franchise system? As with most things, it depends. The statistics certainly seem to bear this out, and they also shed light on just how much franchisees’ success can be dependent upon their franchisor’s efforts to build the system (despite the disclaimers in their franchise agreement that say otherwise). In order for the brand to grow, you need the franchisor to sell franchises. If you are the first franchisee to buy, you could also be the last; or, you could be an early adopter who gets to benefit from your ambition. Legal Considerations for Buying into a Startup Franchise Regardless of the franchisor’s experience, buying a franchise is a risky investment that requires thorough due diligence and careful planning and preparation. From a legal perspective, here are some of the key factors to consider: The Franchisor’s Expansion Plans – If you will be one of the first […]

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