If you recently attended a franchise show and are thinking about buying a franchise, there is a lot you need to know. Buying a franchise is a major investment; and, while franchise ownership presents many opportunities, there is also a lot that can go wrong. Before you sign a franchise agreement, be sure to follow these 10 tips from national franchisee attorney Jeffrey M. Goldstein.
10 Tips for Prospective Franchise Buyers
Tip #1: There Are Lots of Franchise Concepts Out There
The first thing to keep in mind is that there are lots of franchise concepts out there—far more than show up at any one franchise show. Given how important it is to ensure that you are making an informed buying decision, it will be worth your time to do some additional research and determine if there are any other concepts you may want to pursue.
Tip #2: It Is Important to Consider Competing Franchise Opportunities
Once you have identified a short list of final contenders, another key step is to compare competing franchise opportunities. Even if you have an affinity for a particular brand, you may find that one of its competitors offers a better royalty rate, more support or a better package overall. If a competing brand is just as successful, if not more so, it will be worth giving serious consideration to whether this might be the better choice for your franchise acquisition.
Tip #3: Thorough Due Diligence is Essential
Another key step once you have a short list of final contenders is to conduct thorough due diligence. The information you gathered at a franchise show just scratches the surface of what you need to know in order to make an informed buying decision. If you are serious about a franchise opportunity, you will want to schedule a discovery day, and you will want to speak with as many current and former franchisees as possible.
Tip #4: Once You Sign a Franchise Agreement, There is No Going Back
The reason why it is so critical to do your research up front is that once you sign a franchise agreement, there is no going back. Franchise agreements are legally binding and long-term contracts, and franchisors don’t just let franchisees leave their systems. If you decide to leave, there will be a price to pay, and you will be required to comply with your franchise agreement’s non-competition clause and other post-termination provisions. As a result, when you sign a franchise agreement, you need to be committed to moving forward with investing in your franchise and making it as successful as possible.
Tip #5: You Need to Read the Franchise Agreement and the Franchise Disclosure Document (FDD)
While the franchise agreement is the binding contract that will govern your relationship with your franchisor, you need to read both the franchise agreement and the Franchise Disclosure Document (FDD). The FDD contains information that isn’t in the franchise agreement, and it is a good starting point for coming up with questions to ask before, during or after your discovery day. Among many other things, the FDD should provide answers to questions such as:
- How much experience do the franchisor’s executives have running a franchise system?
- Has the franchisor filed for bankruptcy? Is it in litigation with any of its franchisees?
- What is the total estimated initial investment to open for business?
- What is the franchisor’s current financial status?
- Is the franchise system growing, stagnating or contracting?
These are all critical pieces of information for prospective franchisees—and they aren’t necessarily pieces of information that you will be able to obtain from the franchisor’s representatives during a show or conference.
Tip #6: Individual Issues and an Accumulation of Smaller Issues Can Both Be Red Flags
As you review the FDD and perform your due diligence, you should make note of any issues that concern you. In some cases, one issue alone can be enough to take a potential franchise opportunity off of your list. In others, an accumulation of smaller issues might suggest that you would be better off elsewhere. Again, informed decision-making is key, and it is ultimately up to you to decide whether you are comfortable moving forward with buying a franchise.
Tip #7: It is Important Not to Get Emotionally Invested Too Soon
Many people first get interested in buying a franchise because they are a fan of the brand. While this is completely fine, it is important not to get emotionally invested too soon. If a franchise opportunity does not seem viable to you for any reason, you need to be prepared to walk away and consider the other opportunities that are available.
Tip #8: You Need to Carefully Consider Your Financing Options
Along with carefully considering your franchise opportunities, you also need to carefully consider your financing options. Many franchisors offer financing, and they will often promote their in-house financing at shows. But, this option can be both riskier and costlier than other options that are available. If you qualify for an SBA loan or veteran’s loan, this could be your best option—but, here too, you need to ensure that you are making an informed decision.
Tip #9: You May Need to Negotiate Certain Provisions of Your Franchise Agreement
At shows, franchisors’ representatives will often present their franchise agreements as fair contracts that don’t require negotiation. This is nothing more than a sales tactic. You may need to negotiate various provisions of your franchise agreement, and your failure to do so could lead to unnecessary costs and risks in the future.
Tip #10: There Are Lots of Ways an Experienced Franchisee Attorney Can Help You
From helping you identify issues in franchisors’ FDDs to negotiating your franchise agreement on your behalf, there are lots of ways an experienced franchisee attorney can help you. If you are thinking about buying a franchise, we invite you to contact us for more information.
Schedule a Free Initial Consultation with National Franchisee Attorney Jeffrey M. Goldstein
Are you considering a franchise opportunity? If so, national franchisee attorney Jeffrey M. Goldstein can help you make an informed buying decision. To schedule a free initial consultation, call us at 202-293-3947 or get in touch online today.
