Search Results: due diligence
Franchise Due Diligence: Getting the Most Out of the Item 20 Disclosure Tables
Feb 12, 2018
If you flip through a typical Franchise Disclosure Document (FDD), most of what you will find is page after page of small, dense text that was clearly written by an attorney. However, things change (briefly) when you get to Item 20. In Item 20, franchisors are required to produce a series of five standardized tables that provide historical information, current information and future projections about the size and growth of the franchise system. Carefully reviewing the data in Item 20 can tell you a lot about a franchise system. Has it grown consistently over the past three years? Have franchisees been leaving the system on a regular basis? Is the franchisor focused on expanding through franchising or company-owned outlets? You can gain insight into these issues and more through Item 20 of the FDD. Breaking Down Item 20 of the Franchise Disclosure Document (FDD) 1. Systemwide Outlet Summary The first table in Item 20 is labeled, “Systemwide Outlet Summary,” and it simply compiles data from tables three and four. Here you will find: The total size of the franchise system (including franchised and company-owned outlets) The net change in franchised outlets for each of the past three years The net change in company-owned outlets for each of the past three years All of this information is important for assessing the health of the franchise system as a whole, and the later tables provide information that is specific to your state. 2. Transfers of Outlets from Franchisees to New Owners (other […] Read more
How to Gather Information from New and Existing Franchisees During Your Due Diligence
Jul 21, 2017
In a previous article, we highlighted the importance of asking questions during the due diligence process, and we discussed four types of issues that demonstrate why franchisees should not rely on franchisors’ Franchise Disclosure Documents (FDDs) and marketing materials alone. We also mentioned the importance of talking to both current and former franchisees. This article covers some basic tips and questions to ask when contacting current and former franchise owners. How to Find Current and Former Franchisees But, before we get ahead of ourselves, how do you contact current and former franchisees? Fortunately, the requirements of Item 20 of the Franchise Disclosure Document (FDD) make this simple. In Item 20, franchisors must disclose contact information for: Current franchisees, Franchisees who have left the system within the past year, and Franchisees who have not communicated with the franchisor within the past 10 weeks. When contacting these individuals, keep in mind that they may have additional references as well. They may have an older version of the FDD that they are willing to share; or, they may know of other current or former franchisees who can impart particularly-valuable information. Questions to Ask Current and Former Franchisees During Due Diligence Once you start reaching out to current and former franchisees, what types of questions should you ask them? Here are some general recommendations: 10 Questions for Current Franchisees Has the franchise opportunity met your expectations? In what ways is operating your franchise different from what you expected? Are you consistently able to meet […] Read more
10 Key Considerations for Due Diligence in Purchasing a Franchise
Nov 1, 2016
When considering a franchise opportunity, it is critical to conduct your due diligence. Buying a franchise is a substantial, long-term investment, and your success or failure will hinge in large part on the actions, omissions and obligations of your franchisor. Franchise due diligence is an involved process that takes time, effort and a commitment to finding real answers instead of simply trying to validate your interest in the franchise. The following is a list of 10 examples of steps prospective franchisees can take to learn more about their potential franchise opportunities: Franchise Due Diligence: 10 Steps 1. Talk to Current Franchisees. How are their businesses doing? How long did it take them to become profitable? How supportive is the franchisor? Current franchisees can provide invaluable information to help you decide whether to pursue a particular franchise opportunity. 2. Talk to Former Franchisees. Former franchisees are a key source of information as well. Why did they leave the system? Would they do it again if they had the chance? What is their opinion of the franchisor? 3. Visit the Franchisor’s Headquarters or Company-Owned Location. The in-person visit is an important step in the due diligence process. You will want to meet the franchisor’s key personnel in person, and see if you think you will be a good fit for the way they do business. You should also try to visit several franchised locations. 4. Review the Franchisor’s Franchise Agreement and FDD. While you should hire an attorney to review the franchisor’s […] Read more
Thinking About Buying a Franchise in 2021? Here’s What You Need to Know
Dec 31, 2020
If the start of the New Year has you thinking about buying a franchise, there are several important factors you will want to consider as you evaluate different franchise opportunities and make your final decision about moving forward. While many of these factors have to do with the financial aspects of buying a franchise, you need to consider the pertinent legal issues as well, as failing to protect yourself legally could potentially put your franchise in jeopardy. Here, national franchise lawyer Jeffrey M. Goldstein discusses four important legal considerations for individuals who are thinking about buying a franchise in 2021: 1. How Have Other Franchisees Fared During the Pandemic? Even once the COVID-19 vaccine is available to everyone nationwide, things still won’t fully be back to normal for some time. As a result, while there is reason for optimism in 2021, as a prospective franchisee, it is still important to take cues from 2020. Within the brands you are considering, how have existing franchisees fared during the pandemic? Are they optimistic about the future? You can find franchisees’ contact information in the Franchise Disclosure Document (FDD), and you can – and should – speak with many franchisees during the due diligence process. 2. What Will Happen if Your Franchise Isn’t Successful? No one wants to think about the possibility of failure when buying a franchise. But, the reality is that addressing this contingency is one of the most important aspects of ensuring that you have reasonable legal protections before you […] Read more
5 Legal Considerations for Buying a Mobile Franchise
Dec 29, 2020
The COVID-19 pandemic has forced the vast majority of Americans to spend more time at home, and it has had a hugely detrimental impact on the brick-and-mortar retail sector. Even with some light at the end of the tunnel heading into 2021, there are still many unknowns, and many experts are suggesting that consumers’ enhanced reliance on home services and home delivery will be an enduring trend. Given these considerations, buying a mobile franchise may seem like a good option. If you are thinking about buying a mobile franchise, what do you need to know? Here are some tips from national franchise attorney Jeffrey M. Goldstein: 1. Make Sure You Know What it Takes to Succeed Succeeding as a franchisee requires different skills and a different mindset than succeeding as an independent business owner. While you will need some of the same general business skills, you will also need to be able and willing to operate within the confines of the franchise system. While there are no true “keys” to success, there are steps you can take to improve your chances of building a profitable mobile franchise. 2. Make Sure You Know Why Franchises Fail In addition to knowing what it takes to succeed, it is also important to know why franchises fail. Building a successful franchise requires more than the ability to market and operate a successful business. Your success will be contingent upon your franchisor’s business practices as well; and, in many cases, franchisees fail because their franchisors […] Read more
What Happens After You Sign a Franchise Agreement?
Dec 22, 2020
Signing a franchise agreement signals the end of one process and the beginning of another. You have completed your evaluation of competing franchise opportunities and due diligence, and now you are officially a “franchisee.” So, what’s next? Here, franchise lawyer Jeffrey M. Goldstein explains what happens after you sign a franchise agreement: What Does It Mean to Sign a Franchise Agreement? A franchise agreement is a binding contract that establishes the franchisor’s and franchisee’s respective rights and obligations. Once you sign, there is no going back. You are committed to building and running your franchise, and you must now begin thinking in terms of what is and isn’t allowed under the terms of your agreement. You will soon be required to pay your initial franchise fee (if you haven’t paid it already), and this fee is almost certainly non-refundable under the terms of your franchise agreement. You probably only have a certain number of days or months to get your franchise up and running as well; and, even if you don’t open in time, you could still be liable for making monthly royalty and marketing fund payments. What Are Your Next Steps After Signing a Franchise Agreement? Once you sign a franchise agreement and pay the initial franchise fee, what are your next steps? Typically, you will be required to participate in some form of training, and you will need to execute a plan for meeting all of your franchise agreement’s other pre-opening requirements. You will need to find vendors, […] Read more
What are Some Red Flags for a Franchisee Lawyer When Reviewing an FDD?
Dec 8, 2020
If you are thinking about buying a franchise, you probably have a list of factors that you are using to build a list of the brands you want to consider. The initial investment, royalty rate, number of local franchisees—these are all important considerations when choosing the franchise opportunity that makes the most sense for you. But, when you hire a franchisee lawyer to review your Franchise Disclosure Document (FDD), what are some of the issues that he or she will consider “red flags”? 5 Examples of Legal Issues that Could Spell Trouble for Prospective Franchisees A franchisee lawyer reviews an FDD from a very different perspective than a prospective franchisee. For example, here are five potential “red flags” from a franchisee lawyer’s point of view: 1. A History of Litigation (Especially Involving Franchisees) Most prospective franchisees skip over Item 3 of the FDD. However, from a franchisee lawyer’s perspective, the litigation disclosures in Item 3 can be extremely important. This is especially true if the franchisor has a history of litigating with its franchisees, although any significant amount of litigation could mean that the franchisors’ focus and resources will be shifted away from supporting franchisees and growing the franchised brand. 2. An Inexperienced Leadership Team Many franchise systems grow out of successful retail businesses. If your franchisor owned a successful business and then decided to franchise, lack of experience in franchising—as indicated in Item 2—could potentially present a concern. 3. Lack of a Registered Trademark One of the main reasons […] Read more
What Happens if I Don’t Negotiate My Franchise Agreement?
Dec 1, 2020
When buying a franchise, it is important to hire a franchisee attorney to review the Franchise Disclosure Document (FDD) and negotiate the franchise agreement. You have heard this advice plenty of times before. But, is it really necessary? What are the chances of a legal issue actually putting your franchise at risk? Given how much you are investing already, couldn’t you save some money and just accept the terms of the franchise agreement as they are written? When buying a franchise, conducting thorough due diligence, and negotiating your franchise agreement are two of the most important aspects of the process. To illustrate, let’s consider an example of what might happen if you sign the franchisor’s form agreement: You Need (or Want) to Cut Costs You’ve been operating your franchise for a while, and you have identified some areas where you could cut costs and increase your profit while also providing a better product or service to your customers. You decide to make some changes; and, just as your business starts to improve, you get a notice from your franchisor. You are in default of your franchise agreement because: You have purchased products from a company other than your franchisor’s designated supplier; You have deviated from the franchise system standards in violation of the Operations Manual; and, You started selling a new product or service without the franchisor’s approval. Not only must you revert to your franchisor’s “approved” less-profitable business model in order to save your franchise, but you must also […] Read more
Should You Shop for a Franchise By Price Point?
Aug 10, 2020
When researching franchise opportunities online, you will come across several lists with names like, “Top Franchises Under $30,000” and “Cheap Franchises Under $10k”. While these make for good headlines, does it really make sense to shop for a franchise by price point? Here, national franchise lawyer Jeffrey M. Goldstein shares his thoughts. 1. What is the “Price Point”? When talking about franchise price points, it is important to ask: What “price point” are we talking about? Generally speaking, there are three options: The Initial Investment Fee disclosed in Item 5 of the Franchise Disclosure Document (FDD) The total estimated initial investment disclosed in Item 7 of the FDD The total cost of ownership over the lifetime of the franchise Most online lists focus only on the Initial Investment Fee. There are a couple of reasons why. First, this number is easy to find, and this makes it easy to compile a list. Second, this is the lowest number that can reasonably be characterized as the “price point” for a franchise. So, while this number ultimately only reflects a small fraction of the cost of franchise ownership, it is a good choice for marketers seeking to get clicks from prospective franchisees. 2. Price Point is Only One of Several Factors to Be Considered While the amount of money you have available to invest in a franchise is certainly a factor to be considered, it is not the only factor that should drive your franchise buying decision. From brand recognition and franchisor […] Read more
Checklist: What Do You Need to Do Before Buying Franchise?
Aug 3, 2020
Buying a franchise is not a simple process. There are several steps involved, and you need to do everything you can to make sure you feel as confident as possible that you will be able to succeed as a franchisee. Too often, prospective franchisees rush the buying process—either because they are excited about the franchise opportunity, or because the franchisor’s sales reps encourage them to sign quickly without doing their full due diligence. When buying a franchise, there is no substitute for hiring an experienced franchise attorney to guide you through the process. With that said, as a prospective franchisee, there are several steps you can take on your own, and it is important to be aware of the overall timeline of the franchise buying process. Here is a checklist you can follow: 10 Steps in the Franchise Buying Process 1. Compare Franchise Opportunities Before settling on one particular franchise opportunity to pursue, it is important to consider the competition. How are the franchised brands similar? How are they different? 2. Choose a Franchise Opportunity to Pursue Next, it is time to choose the franchise opportunity you are going to target. From this point forward, you will be devoting a lot of time and effort to your chosen opportunity, so you will want to choose wisely. 3. Meet with the Franchisor Once you choose a franchise opportunity to target, it is time to meet with the franchisor. Schedule an appointment via videoconference or in person, and be prepared with a […] Read more