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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You Lost Your Job. Is it Time to Buy a Franchise?

Feb 20, 2019 - Blog by |

Forbes.com recently published an article titled, “Laid Off? Why Now Could Be the Best Time to Franchise.” The article discusses some of the potential benefits of franchise ownership, and it provides an introduction to some of the financial considerations involved in choosing between various franchise opportunities. Losing a job is an event that causes many people to re-examine their priorities; and, to be sure, buying a franchise is one option that is available. However, before committing to any particular franchise opportunity (or franchise ownership in general), it is important to critically assess your goals, skills and financial circumstances in light of the realities involved. 1. Buying a Franchise is a Long-Term Commitment Buying a franchise typically means committing to a contractual relationship for two, three, five or ten years. Even if you find a work-from-home franchise that allows you to open for business relatively quickly, buying a franchise is not a short-term solution to being out of work. The decision to buy a franchise should be made based upon a sincere desire to run your own business within the confines of the franchise structure and should not be triggered by any one single event. 2. Buying a Franchise Requires Access to Capital When you buy a franchise, you need to pay the franchisor’s initial franchise fee, you need to cover the expenses involved in establishing your business (which can range from tens of thousands to millions of dollars), and you need to have a capital reserve to fund your business […]

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IFA Announces Partnership with National LGBT Chamber of Commerce

Feb 15, 2019 - Blog by |

The International Franchise Association (IFA), the “world’s oldest and largest organization representing franchising worldwide,” recently announced a partnership with the National LGBT Chamber of Commerce (NGLCC). According to the IFA, the goal of the partnership is, “to further the organizations’ shared missions of creating business opportunities for all Americans and cultivating diversity and inclusion within the franchising industry . . . [and the] partnership is NGLCC’s first programmatic partnership with a trade association.” As a result of the partnership, the IFA will also be recognized as a Trade Association Sponsor by the National Business Inclusion Consortium (NBIC), which is a coalition of diverse business organizations including the NGLCC, the United States Black Chambers, Inc., Disability:IN (formerly USBLN), the United States Hispanic Chamber of Commerce, the United States Pan Asian American Chamber of Commerce, WEConnect International, and the Women’s Business Enterprise National Council. In a statement, NGLCC President Justin Nelson stated that the partnership will “bring [] LGBT franchise owners one step closer to having their voices heard and securing the LGBT business community an equitable seat at the table.” About the International Franchise Association (IFA) The IFA is perhaps the most well-known membership organization in the franchising industry. It works to promote the interests of the franchise industry through education, advocacy and government relations, and its members include franchisors, franchisees and suppliers. More information can be found at franchise.org. About the National LGBT Chamber of Commerce (NGLCC) The NGLCC is an advocacy organization that promotes diversity and inclusion for lesbian, […]

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Special Considerations for Purchasing a Child-Related Franchise

Feb 13, 2019 - Blog by |

If you love working with children and want to be your own boss, buying a child-related franchise may seem like the perfect fit. After all, who wouldn’t want to hit the ground running with a recognized brand and a business format that has proven effective at tens – if not hundreds – of locations around the country? While buying a franchise certainly can offer these benefits, not all franchise opportunities are created equal, and owning a franchise presents certain unique challenges as well. Providing child-related services also presents some unique risks; and, as a franchisee, you can expect to bear full responsibility if something goes wrong. If you are thinking about buying a child-related franchise, here are some of the key legal considerations you will want to keep in mind: 1. Liability (and Insurance) Working with children or providing services to children inherently presents liability risks that are not present for other types of businesses. Children cannot legally waive liability, so you will need to make sure their parents do so on their behalf. While your franchisor should provide a waiver form that contains the necessary language: (i) this language may or may not be enforceable in your state; and, (ii) it will be up to you to ensure that all parents sign before dropping their children off at the door. As a result, you should have the waiver form reviewed by an attorney, and you should be sure that you have a system in place for securing parent signatures […]

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Why Doesn’t My Franchisor Want Me to Renew?

Jan 31, 2019 - Blog by |

Your franchise agreement is about to expire. You have reviewed the renewal conditions in your franchise agreement, and you are pretty sure that you have done everything that is required in order to extend your franchise for another term. So, why does your franchisor seem to be the only thing standing in the way? There are a few potential reasons why your franchisor may not want to renew your franchise agreement. Understanding these reasons will help you make informed decisions about your next steps forward. 3 Reasons Why Franchisors Try to Prevent Renewal Although individual circumstances can vary, there are three primary reasons why a franchisor may not want to grant a renewal term to a particular franchisee. These reasons are: To Grant the Territory to a More-Favored Franchisee – Whether you have struggled to consistently meet your royalty and advertising fee obligations, an existing (and more profitable franchisee) has expressed interest in your franchise, or a new prospect is interested in your territory and appears to be more attractive franchise owner, your franchisor may be trying to remove you from the system in order to make room for a more-favored franchisee. To Take Over Your Territory for Itself – If your territory has been particularly profitable, your franchisor may want to take over the territory for itself. It may be that your franchisor wants to let your franchise agreement expire so that it can open a new company-owned location. To Offer an Area Development Agreement to a Larger Franchisee […]

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When You Buy a Franchise, the Onus to Succeed is On You

Jan 25, 2019 - Blog by |

When you buy a franchise, you expect value for your investment. You paid an initial franchise fee and you will be paying royalties and advertising fund fees for years to come, and you – rightfully – expect something in return. However, as a franchisee, the onus to succeed is ultimately on you. No matter what the franchisor’s sales representatives told you during the pre-buying process, and no matter what your preconceived notions of the franchise relationship may be, as a franchisee, you are responsible for your own success. While you should be able to count on your franchisor for basic system support and to grow the general recognition of the franchised brand, it is up to you to turn a profit as a franchise owner. 5 Key Considerations for Early-Stage Franchisees So, what does this mean from a practical perspective? While every franchise opportunity is unique and industry, geographic and other factors will greatly influence the profitability of any individual franchised business, some steps early-stage franchisees can expect to have to take on their own include: 1. Marketing the Business Prior to Opening Grand opening expenditures are (or should be) included in the Franchise Disclosure Document’s (FDD) Item 7 estimated initial investment disclosures, but even the high-end estimate will often fall far short of what franchisees need to spend. Social media and local grassroots marketing efforts may be necessary as well, and franchisees will often benefit greatly from building awareness while they work toward opening for business. 2. Developing and […]

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5 Considerations for Buying a Franchise in 2019

Jan 23, 2019 - Blog by |

Whether you are an experienced franchise owner or you are thinking about leaving your full-time job to enter the world of franchising, buying a franchise in 2019 presents some unique legal and practical considerations. Before you sign a franchise agreement, here are five important factors to keep in mind: Factors to Consider Before Buying a Franchise 1. Franchise Openings, Closings and Projections Franchisors are required to update their Franchise Disclosure Documents (FDDs) annually to reflect new openings and closings and to provide updated projections for the coming year. How old are the data in the FDD you received? While historical figures can still be useful, more-recent trends will give you a better idea of the current state of the franchise system. 2. Industry Factors Speaking of trends, while some franchise concepts have staying power, others seek to capitalize on trends in consumer behavior. The hottest franchise in 2018 may not have much viability in 2019, and the concepts that are popular now may not be popular in 2020. 3. Online Competition Consumers are increasingly turning to the Internet for retail purchases, and new delivery services are making it faster and easier to get everything from food to clothing (that you can try on and send back) at home. Additionally, as we recently discussed, Amazon is offering a $15 per hour entry-level wage, and this may make it harder for franchisees to attract quality employees as well. 4. Franchise Agreement Terms From arbitration to indemnification, franchisors are constantly finding new ways […]

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