Finding oneself unemployed during 2020’s combined recession and pandemic and watching your savings get rapidly depleted, it is normal to start looking for alternatives to replace your income. The Internet and magazines are full of advice from charming “consultants”, advisors and writers suggesting that investing your savings in a franchise is a panacea. After all, if you are your own boss, you can’t get laid off, right? And, in the end, you could either sell the business or pass it on to your children, right? Franchises provide a well-known name, lots of support and training, and a virtual certainty of success, right?
Any one of those mythological things might be true for some franchises. Unfortunately, they are not true for all. Your task will be to try to determine whether any or all of them are true for the franchise you are considering. Do not buy into the argument that “franchising is safe” because “it is highly regulated”. It is not. The Federal Trade Commission requires franchisors to give you a Franchise Disclosure Document, but no on checks to see whether the information the franchisor gives you is true or complete. It often is not. Only thirteen states require franchisors to register offerings with them. Of those, only about seven actually have some staff who read the documents. Those staff are looking for major red flags like missing sections, but have no resources for checking on whether the disclosures are true or complete. If, later on, you discover you were misled, neither the FTC nor your state will do anything to help you. They will tell you “hire a lawyer”.
If you were going to buy a $500,000 house, you would hire an inspector, for at least $2,000, to check the house for problems or defects that you do not have the expertise to identify and understand. If you were going to buy a used luxury vehicle for $75,000, you would take it to a trusted mechanic to check it for problems or defects that you do not have the expertise to identify and understand. If you are going to buy a franchise with an initial fee of $40,000 and a total initial investment of $500,000 and which would lead to your personal liability for $1,500,000, you should consult an experienced franchise attorney to review the documents and check for problems and defects that you do not have the expertise to identify and understand. It may not cost any more than that house inspector—and far more is at stake.
Franchisors spend many tens of thousands of dollars having lawyers write contracts and disclosure documents that are entirely one-sided; that protect the franchisor and give the franchisee absolutely no flexibility and no protection. You need an experienced franchisee lawyer (and other advisors) to understand it and help you decide whether the investment has a realistic chance of meeting your goals. Investing in a franchise may or may not be your solution to unemployment. You can and should get professional assistance in sorting the emotion from the facts and making a good business decision for you and your family.