BUYING A FRANCHISE–WHAT ARE YOU GETTING FOR YOUR MONEY?
Jan. 15, 2014
Every day people eager to own a business invest $500,000 to a million dollars in franchises where the FDD said the top of the range for “estimated initial investment” was under $250,000-and where the “initial franchise fee” is only about $35,000. When buying a franchise, the first question they should be asking is what are they getting for all that money?
The promise of franchising is four things: (1) a well known tradename or trademark; (2) initial training in how to operate the business; (3) a proven system with most of the “bugs” already fixed; and (4) ongoing support and training. It is the perceived difficulty and risk of not having those things that prevents most people from undertaking to launch an independent business. Those are the benefits that franchise sales people preach daily and that the “trade press” touts. In some cases those things are true.
Unfortunately, in a large number of franchises, including in some that are “highly ranked”, one or more, if not all of those promised things is either missing or of little value. A franchise without a well known trademark among prospective customers of the business is like buying an airplane without wings. A recognized trademark is the very essence of franchising. It is the thing that brings customers through the door. If you are considering investing in a franchise, you have to ask whether the trademark, in your area and for your prospective customers, has any greater value than “Bob’s Gizmo Sales”. If the name is not well known (thus having value), then it will only acquire value the same way “Bob’s” would-through your investment and hard work. It is nearly unheard of that a franchisor will spend advertising money developing its name in your neighborhood for your benefit.
As a prospective investor, you should also closely examine the value of the initial training. Remember, you are paying up to about $35,000 for it. Look carefully at the disclosure in Item 11 of the Franchise Disclosure Document, but also talk with existing franchisees. Did they really get that much value? Will you really learn everything you need to know about how to operate the business? Or will you, as many franchisees discover too late, be in business “for the franchisor and by yourself”?
The third promise you should evaluate is whether the franchisor offers a “proven system”. The business system is of no value to you if you are going to be the franchisor’s guinea pig-to work out those bugs. It would be extremely rare that a franchisor with only a few outlets would have a “proven system”. The only way to find out is to spend a lot of time in the franchisor’s business or the business of any existing franchisees to determine just how “proven” it is. Otherwise, you will discover-too late-that you have to go through all the same pain of working the bugs out that you would have had you opened as “Bob’s Gizmo Sales”.
Finally, you should evaluate what the franchisor promises regarding ongoing support and training. Examine Item 11 of the FDD very carefully. If the FDD lists the franchisor’s “after you are open” obligations in “wiggle words” such as “we may”, “as we determine” or “in our discretion”, then the franchisor is not making any contractual promises to provide ongoing support. Look for clear and unequivocal promises, without conditions. If you don’t find them, be suspicious and continue your search. An experienced franchisee lawyer can help you in identifying and understanding all of these issues as you make your decision about buying a franchise.