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?
If you are considering buying a franchise, you need to beware of empty promises from the franchisor. Over the last few years, franchise agreements have become extremely one-sided. Recently, many franchisors are making no enforceable promises to provide franchisees with any support or assistance after their business opens.
When reviewing a business contract or franchise agreement for a client, we often read the dispute resolution section first. That section describes the process the parties will use to resolve disputes and what will happen if either party decides to file a lawsuit.
If you are experiencing problems with your franchisor, beware of signing amendments to your contract or any other document purporting to resolve the problems. It is common for franchisors to give you a small concession to “help” you-but to extract a general release of claims and various factual “representations” in return.
Why would you spend the time and money to set up a legal entity–a corporation or LLC (Limited Liability Company)–if you did not plan to use it? It seems that almost weekly we learn that people have a legal entity they paid for–but they never took the steps necessary to properly transfer their business or its assets into the entity.
When buying a franchise, think before you convert your existing business to a franchise. If you have an existing business, you may discover opportunities to convert your business to a franchise–to get the benefits of a “well known brand”, to gain “purchasing power”, or to gain advertising and support. You may even be tempted because of the attractiveness of the package.
In buying a franchise, beware of the lies, damned lies and statistics–about 90% success rates, among other things. At some point in the process of buying a franchise, someone will probably tell you that 90% of all franchises succeed. That person is lying. Years ago, the Department of Commerce produced a “study” with that statistic and unscrupulous franchisors and franchise brokers have been relying on it ever since.
At least weekly we hear from a franchisee, after buying a franchise, that “I should never have bought it.” That realization stings. It signals that the honeymoon has ended and the spell cast by the sales consultant has worn off. Frequently, it signals the impending economic death of the franchisee-and the ultimate “death by a thousand cuts” of the franchisor.
Almost every franchisee, when buying a franchise, is asked to sign a document containing false statements–in order to be “awarded” a franchise. No franchise or other business opportunity is worth signing something false to get it.
With jobs scarce for college students and new graduates, college students should beware of an increasingly active predator-the franchise sales person. They haunt job fairs and campuses with tantalizing “opportunities” to start your own business by buying a franchise; opportunities to be free of the lines for every job opening. What they are offering, unfortunately, is indentured servitude that can be hard to escape.
