Important Considerations for Buying a Franchise
Operating a franchised business can be a profitable venture. Likewise, it can be a recipe for disaster. The distinguishing factors for success include how well an individual researches the franchise and his dedication to the business.
What is a franchise agreement?
A franchise agreement is an contract between the franchisor and the entrepreneur (who becomes a franchisee) that grants a person the right to sell goods or services under the franchisor's method of operation. In exchange for a fee, the franchisee may use the franchisor's trade name or symbols. Normally, ongoing royalty payments are required to the franchisor.
What should I review before purchasing a franchise?
Franchises are subject to both federal and state law. At the federal level, the Uniform Trade Commission ("UTC") mandates that the franchiser prepare a Franchise Disclosure Document ("FDD"). The FDD is the single most important document that one should review before making any decisions about a franchise. The franchisor must give any potential franchisee at least fourteen (14) business days to review the FDD before the signing of a contract and before any monetary payments are made.
It is highly recommended that FDDs are read with assistance from financial advisors and legal counsel, especially if someone is just venturing into franchising. Most FDDs are between 100-200 pages long - and all the information contained therein is important! The FDD has twenty-three (23) "Items" that should answer many of the questions you have about the franchisor, such as renewal and transfer rights, legal obligations, and statistics.
What should I consider before purchasing a franchise?
After reviewing the FDD (again, hopefully with assistance from professionals), you should take a step back and consider whether the franchise is a good fit for you. It cannot be emphasized enough that investigating before investing is crucial in franchising. While the following list is only a short list of things to consider, it should put you on the right path to making an informed decision:
- What will you bring to the table? Why are you a good fit for the franchise and how can you benefit it with your skills and capabilities?
- What is the current state of the industry? Is consumer demand for the product or service strong? Will it continue to be?
- What is the marketplace like where your franchise will be located? Is there stiff competition or an open market for the product/service?
- What is the franchisor like? What is its business history, financial situation, management theory? How much interaction will you have with the franchisor?
- How have other franchisees fared with the business?
- How much are you willing to invest in the franchise? What does the franchisor pay for and what costs will be left up to you?
Investing in a franchise is a serious business decision. There are lots of factors to consider; the most important one just may be yourself-what can you contribute financially, time-wise and skill-wise? It may not be your name on the building, but it will very much be your business. Make sure it is the right one.
Maegan Pirtle and Shawn Beloin, Law Clerks for McBrayer, also contributed to this article.