Five Things to Consider Before Buying a Franchise Interest
Know who you are doing business with. Get written documentation. These words of advice hardly qualify as business tips. However, they still underpin the logic behind buying a franchise interest and protecting your investment. The franchisor is who you are doing business with, for example, corporate Dunkin Donuts. A franchise agreement is what you must have in writing. A business law attorney should review the agreement, along with the disclosure document.
Before even entering a franchise relationship, it is crucial that you do your due diligence investigating the franchisor – this should involve legal issues, accounting and finances. This process begins long before you sign on the dotted line and it requires an attorney who has a background in business law and has experience with franchises.
Even with that attorney’s assistance, buying a franchise interest is still a large financial commitment. So, you still have your work cut out for you. The following are helpful hints to follow:
Read the Franchise Disclosure Document
Negotiations begin with the Franchise Disclosure Document, or the FDD. You must read this, several times and should review it with an experienced business law attorney, accountant and your financial advisor. Items in this document affect your future financial performance and your earning potential.
Itemize the Franchise Disclosure Document
Once you have read it over, your next step should be breaking it down, item by item. For example, certain provisions provide critical details regarding earnings, costs and other factors. This is where a franchisor should disclose information pertaining to the franchise’s financial performance.
Another provision contains the franchise’s history of litigation. Be on the lookout for excessive litigation. Franchisees suing for fraud during the sale process or lawsuits filed for a lack of support from the franchisor are red flags. Also, class action lawsuits involving many franchisees are never a good sign.
Speak to Franchisees
You should already have done your homework as far as the turnover rate is concerned. That does not mean you should rely on numbers alone. Pick up the phone. The corporate team will provide you with a short list of names, but feel free to go through the list on the FDD. Formulate questions in advance, such as whether the business has met its financial needs or how long it took to get a return on its investment. Remember, this business was once in your position, which usually means its representatives are inclined to cooperate and deliver valuable information.
Speak to the Franchisor
Again, you should already know background on the business. Research the frequency of liability claims against the franchisor. All of this comes with the territory, but it never hurts to have a frank conversation with the franchisor. In fact, it is essential that you do. Ask the businesses' representatives about plans for the future. Are there plans to grow the brand? It cannot hurt to find out about its highest performing franchisees. What are the market demographics? Inquire about the competition already existing in the market of where you will be opening the franchise interest.
Form a Plan
Once you have learned about the franchisees and the franchisor, you should have a feel for compatibility. Now it is time to form a plan. Start with an analysis of growth possibilities. In other words, how much can you make?
Think of contingency plans. Your desired territory might not be available, or you might fail to obtain the right financing. What do you do? Ask the franchisor what help might be available.
If you are interested in buying a franchise interest, contact my office for an appointment. It is important to understand your rights and responsibilities and the risks and rewards that come with such an endeavor.
The Law Office of H. Benjamin Sharlin LLC
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