IF YOU WANT TO BUY A FRANCHISE – AN OVERVIEW
Franchising Realities & Remedies: Page 1
If You Want to Buy a Franchise: An Overview
By Harold Brown ©1999
Reprinted with Permission
Don’t sign any contract or pay any money until you study the whole proposition.
You are entitled to an advance Prospectus, called the Franchise Disclosure Document (the “FDD”), that describes the franchise and contains the contract they want you to sign. It is almost impossible for you to understand these documents without the help of a lawyer, hopefully one who is experienced in franchise opportunities.
Don’t rush. You need time to find out more about franchising and especially about the one in which you are interested. It may take two to four weeks or more for an experienced counselor to help you to understand what is involved.
You can telephone and visit several of the existing and former franchisees whose names and addresses are listed in the FDD. Former franchisees will be especially helpful to tell you their experiences and even your chances of success in your proposed marketing area.
You have to carefully study all of the cash investment you must make in order to buy the franchise, get set up in a place of business, purchase the capital assets you will need, learn how to operate the business, and get ready to open for business.
You need to know a lot of things about the state and city which are made available to you and about the specific site. This includes questioning as to the franchisor’s responsibilities in its choice and control.
It may take as much as one to two years or more for your business to reach the “break even” point. That can require a large amount of cash in order to keep going. The “break even” point will not make up for the losses you suffered until that level was reached.
Check on the reputation and experience of franchisees in the same system and in the immediate vicinity of your proposed site. Unless there are enough of them to share your cost of media advertising, like TV and radio, it may cost you too much to pay for this by yourself. Group advertising is essential.
You really need to know what amount of gross sales you can reasonably expect, plus your gross profit and the net profit to you after all expenses. Many franchisors won’t give you those figures. Unless you have such information, it is unwise to invest the tens or hundreds of thousands of dollars that are often necessary to buy the franchise license, set up the business, and carry on until you can earn a living and get a fair return on your investment.
Some of the crucial matters that you or your lawyer should carefully examine are: your specific rights and duties; your franchisor’s initial and on-going duties to you; and your legal rights:
A. to remedy any default;
B. to renew your franchise;
C. to sell your business;
D. to stop unfair encroachment;
E. to get a fair trial for your complaints either in court or in arbitration in your locality;
F. to join and participate in a franchisee association;
G. to buy from various suppliers so long as the franchisor’s standards and specifications are met;
H. to share in the benefits of your advertising contributions;
I. to set your own selling prices; and
J. to rely on your franchisor acting in good faith.