In evaluating and buying a franchise, there are many things you should consider. Not every franchise is a good investment. You should analyze any franchise offering carefully and make sure it does not contain one or more bad provisions that are inconsistent with what you should reasonably expect. Here are 5 key things to look for:
1. No financial performance information. Every franchisor has the right to include historic financial performance information regarding existing outlets. If they elect to not include that information in the Franchise Disclosure Document (FDD), it often means that the franchisor knows that, if you knew the truth about how poorly the existing outlets were doing, you would not buy. You should not buy unless you know the truth.
2. Right to buy your assets. Franchise agreements contain many forms of “right of first refusal” or option to buy your business assets. You need to have the language carefully analyzed by an experienced franchisee lawyer. These provisions limit your ability to sell the business for any price. Being obligated to sell at the “depreciated value” could reduce your maximum sale price to zero in five years or less.
3. Too many controls. If the franchisor controls virtually every aspect of opening and operating the business, you are really nothing but an unpaid manager who invests a large amount of money in the franchisor’s business. True business ownership necessarily includes the ability to control certain key decisions about the business that affect profitability such as hours, staffing levels, prices and range of products. The essence of franchising is that you give up some of those controls in exchange for a tested system and a valuable name. If you are being asked to give up all controls in exchange for an unheard-of name and an unproven system, you may be paying too much for too little. An experienced franchisee lawyer can help you sort it out.
4. The franchisor is broke. Beware of the “sizzle.” Not everything that sparkles is gold. Base your decision on cold hard facts. Hire someone to dig behind the surface of the FDD and of the financial statements to determine if the franchisor has the means (without selling a lot of franchises) to perform and provide you with the support the salesperson promised.
5. Trademark is not registered. If the franchisor’s trademark does not have a federal registration for the type of goods and services you will be selling, then you may have no protection against infringement and competition. You could also learn that someone else claims a superior right to the trademark and that you are suddenly required to spend a lot of money to adopt a new trademark. It could be the difference between success and failure for your business. The value of the “brand” is a significant part of what you are purchasing when you buy a franchise. If it isn’t protected, what are you paying for?
Although not a complete list, if you are considering buying a franchise, look for these five key things, and if any of them are present, you need to consult with an experienced franchisee attorney and seriously consider whether this franchise is a good investment.