How to Buy A Franchise
A LAWYER’S PERSPECTIVE
By Michael R. Liss
"Franchising is the wave of the future," according
to the U.S. Department of Commerce. John Naisbitt writes in Megatrends:
"Franchising is the single most successful marketing concept ever."
Should you consider going into a franchised business? And how do you become part
of this success?
Let’s start with the most important considerations: Before
you buy a franchise, be sure you know yourself, the franchise program, and the
franchise agreement.
KNOW YOURSELF
Do what you like. This is your chance to choose to do
what you really want to do. Take the time to determine what you and perhaps your
family would really like to do while working. You can choose a business you
love. It is not just a job. Your business becomes a part of you. It is a
reflection of you.
Work the numbers. Know what you can afford. How much
cash do you have? How much can you borrow? How much does it cost to start this
business? How much does it take to keep it going until it becomes profitable? An
accountant familiar with business startups will be very helpful in preparing
these numbers. Your preparation of a business plan will help you get ready.
Investigate before you invest.
KNOW THE FRANCHISE
PROGRAM
Be prepared. When you buy a franchise instead of
creating a business from scratch, you can know much more about the business you
are starting. You can prepare. You can determine if a particular franchise
program is right for you. Your access to more information comes from many
sources. You can visit existing stores. You can examine and purchase goods and
services from franchises that are already in the program.
Franchisees tell you the truth. Call these franchisees
and ask them the tough and detailed questions listed in the "Questions to
Ask Existing Franchisees When Buying a Franchise" chart that accompanies
this article. Existing franchisees are typically very open and honest in
relating to you how they bought their franchise business. They will tell you
what they like and dislike about the franchisor and the franchise program.
Franchise prospects have told me stories about existing franchisees inviting
them to come into their stores to actually review the store's profit and loss
records. The existing franchisees remember how they wanted help when they bought
their franchise, and now they want to help you.
Compare offering circulars. All franchise buyers
receive a franchise offering circular from the franchisor. It provides you with
written information about the franchise program and the franchisor's company.
Every franchise offering circular is made up of 23 Items, and the Items always
appear in the same sequence. For example, Item 5 in every offering circular will
tell you about the upfront fees involved in buying the franchise. You can easily
compare one franchise to another by comparing the information in these 23 Items.
Franchisor background. The offering circular provides
you with extensive information. Items 1 and 2 identify the franchisor's company,
type of business, industry, and the experience of each of the franchisor's key
personnel, whom you will be relying upon for support. You should contact the
franchisor's personnel, visit their office, and determine if their knowledge is
what you need and if they fit with your personality and style. Items 3 and 4
tell you about the company's litigation history and bankruptcies. Each lawsuit
is summarized. You can tell what people are angry about, who is suing whom, and
who is winning or losing.
Additional fees and costs. Money and cost information
is in Items 5, 6 and 7. All the fees which you could be required to pay must be
disclosed and explained. Item 5 is the upfront fees. Item 6 is the ongoing fees,
like royalty and advertising charges. Item 7 is a chart that lists for you all
the costs of going into this business. This information is very helpful in
preparing your business plan.
Many franchisors make a significant amount of money by
requiring you to buy products or services from them. This information and how
much the franchisor makes are in Item 8.
Item 9 is a great cross-reference index to find various
topics of interest. It tells you the Item number in the offering circular and
the section number in the franchise agreement. For example, if you want to know
if there is any sales quota involved, Item 9.k of every franchise offering
circular will answer that for you.
Financing. Financing information is provided in Item
10. This item tells you not only if financing is available, but what it costs,
who provides it and what type of items can be financed. It even provides you
with copies of the legal documents you would be asked to sign to obtain this
financing.
Support. Many franchisees buy franchises in order to
obtain support and guidance in both opening and running their business. All of
this is in Item 11: Pre-opening training, operation manuals, site selection
assistance, operational consultations, advertising programs, and computer
requirements. By comparing offering circulars from different franchise
companies, you can see what you will get for your money.
Your legal rights. The next few Items in the offering
circular cover many of the nitty-gritty legal issues of owning a franchise. Key
issues include such topics as how long you can be a franchisee for, how you
could ever sell your franchise, non-compete requirements, how the franchise
rights can be taken from you, your rights to cure defaults and keep the
franchise, and even where and how disputes will get resolved.
Franchisee phone numbers. Some of the most important
information is towards the back of the offering circular: A list of every
franchisee, their locations and their telephone numbers is provided. You must
call them. They can tell you the truth about this franchise program. To know how
financially strong this franchisor is, you are provided with three years of the
franchisor's audited financial statements. If the franchisor is going to provide
you information about how much money its franchisees make, it will be in Item
19. Most franchise programs do not and instead direct you to call existing
franchisees to hear first-hand about money matters.
Finally, every contract, lease, or other legal document which
this franchisor will ask you to sign is included in the back of the offering
circular. You can read them now without being rushed.
KNOW THE FRANCHISE
AGREEMENT
Read the franchise agreement, sublease, and other documents
provided in the offering circular. You have time to read them because federal
law prohibits the franchisor from rushing you to sign the contracts or pay
money; in fact, the franchisor must wait at least 10 business days so you can
get prepared.
Hire a franchise lawyer. You will need a franchise
lawyer to work with you because the franchise program will need a careful legal
review. Also, with most franchise programs, you can negotiate and change the
terms of the franchise contracts to be fairer. The contracts start off one-sided
because they are written by the franchisor. It is your responsibility to ask for
the changes you want. A franchise lawyer will know what can be changed and how
to negotiate for you successfully.
Preparing now to make the right decisions will allow you to
start and succeed in your own franchise business.
Michael R. Liss is a business and franchise attorney
working to help businesses start and succeed. He is a frequent
instructor at area colleges on buying a business, franchising,
financing, and the legal issues which business owners must know. He can
be reached toll-free at 888/372-6529.
Questions to ask existing franchisees when
buying a Franchise | 