Bundy & Fichter PLLC Aug. 20, 2021

It was inevitable.  The franchise sales engines have been spewing speculative claims about what we might call “pandemic opportunities”.  The story is that many restaurants (estimates range from 3% to 50%) will close permanently because of the pandemic and the corresponding recession.

The truth is that no one knows how many restaurants and other businesses will permanently close.  The remainder of the truth is that no one knows when demand for restaurant seats will recover to anything close to the numbers of 2019.  None of the speculation takes into account the fact that restaurants and other franchises (think fitness) had seriously over-saturated the market by 2019.  Many franchised businesses were failing for lack of customers long before the rise of COVID-19.

If you talk to a franchise “consultant” during the next year, you will inevitably be told that the opportunities are “great” and that, if you just invest now, you will be rich as soon as the pandemic is over.  Keep in mind that there is a big industry of franchise “consultants”, each of whom works for one or more franchisors and gets paid a handsome (generally $15,000 to $35,000) commission for every franchise they sell.  They are charming, but they do not represent your best interests.  The “consultant” will be gone by the time your business begins to struggle.

This is not to say that there are no good franchises or even franchise “consultants”.  It is to say that you need to protect yourself.  The first step in protecting yourself is to get educated.  It is imperative that you carefully read the Franchise Disclosure Document.  Take your time.  It is not like a “blue light special” that is only good for fourteen days.  The franchisor will not run out of supply if you need additional time.  If the “consultant” tells you otherwise, you should lose interest in that franchise and move on to the next one.  If true, it is probably over-saturated anyway.

The second step in protecting yourself is to consult with an experienced franchisee lawyer.  That consultation will probably cost you a couple of thousand dollars, but it is a small investment considering the risk that signing a franchise agreement exposes you to.  The sales people (aka “consultants”) will try to get you to focus on just the initial franchise fee.  However, keep in mind that you will also be obligating yourself to spend tens or hundreds of thousands of dollars on single-purpose assets and committing to pay royalties for five or ten (or more) years—whether or not the business survives.  In many cases, you will be signing a lease (think hundreds of thousands of dollars in liability) that you have to continue to pay even if the franchise fails.  You will be agreeing that, if the franchise does not work out, for any reason, you cannot be in the restaurant (or other) industry for two or three years.  An experienced franchisee lawyer will help you understand those risks and some strategies for limiting them.

Franchising can be a great way to get into a business.  With the right opportunity, you can buy into a tested, well-developed system with a valuable trademark and unique product.  However, there are far too many franchises where the “consultants” are selling nothing but the “sizzle”—and there is no steak.  No one knows what a post-pandemic franchise world will look like.  In the fraud-filled world of franchise sales, you must take the lead in protecting yourself against promises that the “consultant” has no intention (or ability) to keep.  Read the FDD carefully and retain an experienced franchisee lawyer before you sign anything.