Acquiring a franchise has many benefits, including brand recognition, stability, developed business systems, training and support. However, that ownership also comes with certain limitations, requirements, and potential challenges. If you are thinking about buying a franchise, there are a few things you should consider before making that investment. The decision to buy a franchise should be based on a thorough investigation and review of at least the following items:
- Franchise Disclosure Document (“FDD”): The FDD is a crucial document that provides detailed information about the franchise opportunity. It includes information about the franchisor, the franchise system, fees and expenses, legal obligations, and more. Reviewing this document thoroughly is essential to understand the franchise you are investing in, upfront and ongoing costs, business operations and obligations involved.
- Franchise Agreement (“FA”): The FA is the legal contract at the heart of the relationship between the franchisor and franchisee. This contract outlines the rights and responsibilities of both parties and will likely include terms relating to franchise territory, intellectual property rights, training, support, and fees. The FA will also contain provisions relating to the length of the agreement, termination of the contract, sale of the franchise business and post-termination restrictions on competition. Because the FA controls the franchisor/franchisee relationship, it is important to review this contract in detail before signing.
- Financial Considerations: Owning a franchise involves significant financial investment. Not only is there usually an initial franchise fee, but franchisees are typically required to pay ongoing royalties, advertising fees, and other expenses. Therefore, it is very important to understand what the overall financial commitment to owning and operating a franchise will be.
- Territory and Competition: One benefit of a franchise is that, usually, the franchisee has an exclusive right to operate its business within a certain geographic area and, therefore, does not have to compete against other franchises under the same brand. However, exclusivity is not always the case, and it is therefore important to understand not only the size and location of the franchise territory, but also whether there will be other franchisees within the territory.
- Support and Training: Franchisors usually offer initial and ongoing support and training. The type of training and support as well as the frequency are outlined in both the FDD and the FA. As a potential franchise investor, training and support are important because they may have a direct impact on how successful a franchise ultimately becomes. This is especially true where the investor has little to no experience or knowledge of the business that is franchised.
- Additional Due Diligence: Beyond the foregoing, it is essential to conduct thorough due diligence before committing to a franchise. There are many additional areas to investigate including such things as the franchisor’s financial stability and litigation history. The FDD will disclose current and former franchisees, and you should speak with several to learn of their experience as franchisees, business operations issues and franchisor support. The more you can learn about the franchise system, the more informed your decision to acquire a franchise will be.
- Legal Assistance: Engaging counsel that understands franchising can guide you through the purchasing process, help you understand complex documents like the FDD and FA, and identify what your obligations will be and where the risks are in the process. Counsel can also help negotiate terms with the franchisor and ensure your rights are protected throughout.
The decision to buy a franchise takes careful consideration and due diligence. By thoroughly understanding the business, legal, and financial implications of buying a franchise and entering a franchise agreement, you can make an informed decision. To assist you in that process, we offer a Franchise Review package with a flat fee of $1,500. In this, we will review the Franchise Disclosure Document, Franchise Agreement, related contracts, and provide “a summary of key terms, potential problems, and negotiation points.
If you would like more information or to obtain a Franchise Review, please contact Mark A. Nieds to help guide you through this process.
Mark A. Nieds represents clients in business-related matters including entity formation, business structuring, M&A and contracting. He also focuses his practice on the areas of Intellectual Property. He works with clients to develop comprehensive domestic and international intellectual property management strategies, advising on the identification, protection and enforcement of trademark, copyright and trade secret rights. He has worked with clients on such diverse projects as new product launches, global rebranding and franchise formation.