When exploring franchise opportunities, it is easy to become committed to a particular brand and system early in the process. When this happens, for many people the due diligence process becomes a formality – a way to find affirmations that you have already made the right decisions.
But, this can be a mistake. Many franchisors rely on their ability to make a good first impression, and they do not want prospective franchisees to dig deeper into the system. They do not want prospects to ask about things like carve-outs from their territorial rights, and they do not want them to have the insights of existing and former franchisees. Yet, these are precisely the types of information that are required in order to make an informed decision during the franchise buying process.
If you are preparing to buy a franchise but have not yet performed your due diligence, here are some key questions you will want to ask before you sign:
Questions for the Franchisor
1. What are my territory rights?
Some franchisors offer exclusive territories, some offer protected territories, and some offer territories with no protection at all. Even “exclusive” territories will often be subject to exceptions. If your franchise agreement is not crystal clear on the definition of your territory, this is something that you will almost certainly want to have addressed before you pay your initial franchise fee.
2. How often do you make system-wide changes?
Many franchisors – especially newer ones – make constant changes to their franchise systems. While some of these changes can be fairly minor, others can require franchisees to incur substantial (and unexpected) expenses. Since franchise agreements almost universally require franchisees to comply with changes to system standards, it can be a good idea to find out what you are in for in the future.
3. Are any major changes on the horizon?
Some changes, like re-branding efforts and adoption of new point-of-sale (POS) systems can be extremely – if not prohibitively – expensive for franchisees. This can be a particular concern for new franchisees in their first months of operation.
4. How (and where) is the franchise system growing?
In Item 20 of the Franchise Disclosure Document (FDD), franchisors are required to disclose their projected new openings over the next 12 months. Since it has likely been a while since the FDD was published, is the franchisor on track to meet its projections? Where have the new outlets opened? If new openings are behind schedule, what is the issue?
Questions for Current and Former Franchisees
In addition to speaking with the franchisor’s representatives, it can also be highly valuable to speak with both current and former franchisees. In a follow-up post, we will cover (i) how to contact current and former franchisees, and (ii) questions you can ask to get these individuals’ real thoughts on their franchise experience.
Nationwide Legal Representation for New and Existing Franchisees
The Goldstein Law Firm is a national law firm that exclusively represents franchisees and dealers. If you are considering a franchise opportunity, we can help you gather the information you need to make an informed decision. To speak with franchise lawyer Jeffrey M. Goldstein in confidence, please call (202) 293-3947 or inquire online today.