Buying a franchise is a big deal. It is a major investment, and if you will be running the business, your franchise will soon consume your daily life. As a result, informed decision-making is critical. So, what do you need to know before you buy?
The short answer is, “A lot.”
There are several important factors to consider when buying a franchise. This includes factors related not only to the franchise opportunity you are considering but also factors related to the market, the competition, and your own interests and capabilities. Of course, financing is a key consideration as well, and you will want to make sure that you have access to the funds you need before you begin the buying process. Here are some more insights from national franchise lawyer Jeffrey M. Goldstein:
7 Important Facts to Know Before Buying a Franchise
1. There Are Lots of Competing Franchise Opportunities
Many people initially lock in on one particular franchise opportunity. Usually, they visited an outlet and thought it would be nice to own one, and then their franchise journey started from there.
When buying a franchise, it is important to consider the competition. This includes both competition from other franchised brands and competition from franchisees within your desired franchise system. There are lots of franchises out there, and your ability to succeed will depend heavily on your ability to attract customers and build a loyal following. If your potential customers are already satisfied with the options that are available, this may prove to be a significant challenge.
2. You Are Responsible for Your Own Success
Regardless of the competition, as a franchisee, you are responsible for your own success. Many prospective franchisees assume that they will be able to rely on their franchisor for advice and guidance, but this assumption is largely misguided. While some franchisors provide a significant amount of operational support to their franchisees, many take a big step back once the sales process is complete. Franchisees often report feeling like they are on an island—and, aside from being able to use the franchisor’s branding, they aren’t quite sure what they’re paying for.
3. You Need to Thoroughly Read (and Carefully Consider) the FDD
The Franchise Disclosure Document (FDD) is long and complex, and it’s the last thing most people would want to read. But, when buying a franchise, you need to thoroughly read (and carefully consider) the franchisor’s FDD. The disclosures in the FDD are mandated by the U.S. Federal Trade Commission (FTC), and they are intended to provide you with much of the information you need to make an informed buying decision.
All of the disclosures in the FDD are important for one reason or another. Does the franchisor’s management team have adequate experience (Item 2)? Is the franchisor in litigation or going through bankruptcy (Items 3 and 4)? Are the franchisor’s trademarks registered (Item 13)? Is the franchise system growing or contracting (Item 20)? Is the franchisor in good financial standing (Item 21)? These are just a handful of examples of the information you will need to carefully consider during your due diligence.
4. The Terms of Your Franchise Agreement Matter
The franchise agreement is much more than just legalese. It establishes the terms of your franchise ownership, it establishes your operational and financial obligations, and it governs nearly all aspects of your relationship with the franchisor. As a result, the terms of the franchise agreement matter, and you need to make sure you know what you are signing.
You should read the franchise agreement carefully, along with the FDD. But you should also have it reviewed by an experienced franchise lawyer. Franchise agreements are almost always heavily one-sided, and prospective franchisees will need to negotiate reasonable protections into their franchise agreements in many cases.
5. Once You Sign, the Clock Starts Ticking
Many prospective franchisees are anxious to sign the franchise agreement because they want to lock in their protected or exclusive territory. But, it is important to be aware that once you sign your franchise agreement, the clock will start ticking. Most franchise agreements establish a deadline to open for business, and if you aren’t able to open in time for any reason, you could lose your franchise before it gets off of the ground.
Financing, leasing, building out your space, hiring and onboarding, and numerous other issues can get in the way of opening your franchise. As a result, before you commit to opening by a certain date, you need to make sure that you are in a position to do so.
6. Once You Sign, You Are Locked In
Not only are you likely to have a strict deadline to open once you sign your franchise agreement, but you will also be locked in. You will be obligated to operate your franchise for the full term of the agreement, and you will be required to strictly comply with the franchise agreement and Operations Manual the entire time. If you don’t comply, or if you shut down because your franchise isn’t successful, you could face significant consequences—including liability for “lost future royalties.”
7. An Experienced Franchise Lawyer Can Help You Make Informed Decisions
As we said in the introduction, informed decision-making is key. An experienced franchise lawyer can help you make informed decisions throughout the buying process. Your lawyer can highlight any concerns in the FDD and franchise agreement, negotiate the franchise agreement on your behalf, and provide key insights based on years or decades of experience working in the franchise industry.
Discuss Your Franchise Opportunity with National Franchise Lawyer Jeffrey M. Goldstein
National franchise lawyer Jeffrey M. Goldstein has more than 30 years of experience representing franchisees before, during, and after the buying process. If you are thinking about buying a franchise, we encourage you to contact us for more information. To discuss your franchise opportunity with Mr. Goldstein in confidence, give us a call at 202-293-3947 or request a free initial consultation online today.
