Many experienced franchisees say they wish they had known more about the unique challenges of franchise ownership before moving forward. Not having a clear understanding of the costs involved is a common lament as well. Some also say they expected to take a more hands-off approach than their franchises ultimately required.
When buying a franchise, it is critical to make an informed decision. While it might not be possible to learn absolutely everything, prospective franchisees can—and should—use due diligence to gather the key information they need to decide whether they are prepared to move forward. Working closely with an experienced franchise lawyer is important as well, as such a lawyer can provide key insights unavailable elsewhere.
Recently, Franchise Times published an article highlighting what some current franchisees wish they had known before committing to moving forward. Here are some of the insights shared in the article, as well as some additional insights from national franchise lawyer Jeffrey M. Goldstein:
What Do Franchisees Wish They Knew Before They Bought?
Perhaps unsurprisingly, many franchisees share similar regrets. While this is due in part to franchisees making the same mistakes during the buying process, it is also due in part to the nature of the franchise relationship. With this in mind, some of the most common regrets include:
1. Not Having a Clear Understanding of the Franchisor-Franchisee Dynamic
Many franchisees say they regret not having a clear understanding of the franchisor-franchisee dynamic. While franchise ownership is often promoted as an alternative to starting an independent business—and while franchisees are technically independent business owners—franchisors still play a major role in their franchisees’ business decisions and day-to-day operations.
2. Not Having a Clear Understanding of the Costs of Franchise Ownership
Not having a clear understanding of the costs of franchise ownership is a common regret. Oftentimes, franchisees are surprised to see just how much their royalty and advertising fund obligations reduce their profitability. For many franchisees, mandatory purchases and the use of mandatory suppliers (which may charge higher-than-market rates) are unexpected costs as well.
3. Failing to Appreciate How Much Control Franchisors Can Assert
Many franchisees are surprised to learn just how much control their franchisors can (and will) assert once they open for business. This is due in large part to franchisors’ ability to modify their Operations Manuals, brand standards, and general operational procedures. As a general rule, franchisees must comply with any changes their franchisors implement—and they must do so at their own expense.
4. Failing to Appreciate the Amount of Hands-On Time Required
Many prospective franchisees aim to manage their franchisees as a passive (or at least semi-passive) investment. But this simply is not feasible in many cases. While franchisees can hire managers to run their day-to-day operations, this is another (significant) expense; and, even then, franchisees will still typically need to devote a substantial amount of time to running their businesses and building toward sustainable profitability.
5. Not Taking Into Account the Importance of Renewal
Most franchise agreements have a two- or three-year initial term. Many franchisees are surprised to learn that this is not enough time to recoup their initial investment, much less turn a profit. As a result, many franchisees also say that they wish they had placed more emphasis on protecting their renewal rights when negotiating their franchise agreements.
Setting Reasonable Expectations as a Prospective Franchisee
With these considerations in mind, what can—and should—prospective franchisees do to ensure that they are setting reasonable expectations for the future? Some of the steps that prospective franchisees can take to avoid unhappy surprises include:
- Conducting thorough due diligence
- Attending franchisors’ “discovery days”
- Carefully reviewing the Franchise Disclosure Document (FDD)
- Hiring a franchise lawyer to examine the FDD and franchise agreement
- Negotiating key terms in the franchise agreement
These are just examples. Buying a franchise is a time-intensive process that requires planning and commitment, and different franchises will present different risks. By working with an experienced franchise lawyer, prospective franchisees can avoid unknowingly overlooking key issues, and they can make confident decisions about how, when (and if) to move forward.
FAQs: Making an Informed Decision About Buying a Franchise
How can I make an informed decision about buying a franchise?
Making an informed decision about buying a franchise requires a comprehensive approach to gathering relevant information, evaluating your options, and deciding whether (and to what extent) to negotiate the terms of your franchise agreement. While this is a time-intensive process, the time invested in making an informed decision as a prospective franchisee is well worth it.
How can a franchise lawyer help during the buying process?
There are several ways an experienced franchise lawyer can help during the buying process. These include (but are not limited to): (i) assessing whether the franchisor has met its disclosure obligations; (ii) providing insight on key legal aspects of the FDD and franchise agreement; (iii) negotiating key provisions of the franchise agreement; and (iv) providing additional insights based on experience representing other prospective and current franchisees.
What if I regret my decision to buy a franchise?
If you regret your decision to buy a franchise, you will still generally need to operate your franchise until the end of your franchise agreement’s term. Breaching your franchise agreement can result in early termination and substantial liability for “lost future royalties” and other damages. This is one reason—among many—why it is important to make an informed buying decision.
Request a Free Consultation with National Franchise Lawyer Jeffrey M. Goldstein
If you are going through (or preparing to go through) the franchise buying process, we strongly encourage you to contact us for more information. To request a free consultation with national franchise lawyer Jeffrey M. Goldstein, please call 202-293-3947 or tell us how we can help online today.
