BUYING A FRANCHISE SIMILAR TO YOUR EXISTING BUSINESS–BEWARE!
April 24, 2012
Buying a franchise in the same industry you already have a business in can be a very risky decision. Let’s say you have a current customer base that generates you $10,000 a month in gross revenue, of which $3,000 drops to the bottom line. You receive a solicitation from a very charming franchise “consultant” offering you a franchise with a “known name”, “group buying power”, “proven systems” and all the training an support you could dream of. Should you buy?
Think twice. You really need to do a lot of due diligence-and you need an experienced franchise attorney to guide you through the process and negotiate some critical terms.
You need real and reliable information (if from the Franchisor, it is worthless unless it is in writing and incorporated in the franchise agreement) about how the franchisees in the system have performed. If the typical franchisee is doing no better than you have been doing independently, red lights should flash and sirens wail. Keep in mind that you are going to be required to pay an initial franchise fee and a percentage of your gross revenues in most cases just for the privilege of using the franchisor’s name.
Assuming the franchise offering meets or exceeds that first hurdle (many proven successful franchisees over an extended period of time), you need to look closely at the franchise agreement they will ask you to sign. Almost all franchise agreements provide that the franchisor owns your customer list (and hence the right to serve your customers) should the franchise not work out for you. Most prohibit you from providing similar services to any of your then-former customers after you leave the franchise system for any reason-even if because of something the franchisor did wrong. Most prohibit you from operating a similar business anywhere within 20 to 50 miles (or more) of any other location (anywhere in the world) where the franchisor or any of its franchisees have a business location.
Keeping in mind that only about 15% of franchisees are able to stay in business for five years or more, that means you paid a substantial initial franchise fee and tens of thousands of dollars in royalties (percentage fees) for the privilege of turning over to the franchisor those customers you developed before you even met the franchisor.
You should not sign blindly. You should never say “that won’t happen to me”. If you are in the position of considering buying a franchise to a business similar to one you now own, you need to consult with an experienced franchise attorney. There are important steps you can take to protect yourself-but you cannot go it alone.