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5 Traps for the Unwary Prospective Franchisee

5 Franchise Tips

When evaluating a potential franchise opportunity, prospective franchisees need to take care to put the hype and their emotions in check, and carefully consider all factors relevant to their buying decision. After all, the franchise will be a 5- to 10-year relationship (at minimum, under most franchise agreements), so it is well worth the investment to put in some research and analysis before taking the leap.

The following are 5 potential traps for prospective franchisees to keep in mind when evaluating new franchise opportunities:

1. Putting Blind Faith in Sales Pitches

It is important to remember that, while the franchise relationship is to an extent a symbiotic relationship that relies on the franchisee’s ability to succeed, franchising itself is still a business, and so franchisors (some to a greater extent than others) will try to “sell” you to get you into their system. Most franchise sales pitches, like any others, will focus on the benefits of the system to the exclusion of its risks and limitations. Prospective franchisees should ask pointed questions to investigate the franchise opportunity beyond the unsolicited gloss provided by the franchisor.

2. Only Contacting the Franchisor’s “Recommended” Franchisees

One method of performing this type of due diligence is to speak with the franchisor’s current and former franchisees. Some franchisors will have lists of their “recommended” franchisees that they provide to prospects and suggest that they get in touch with. These franchisees are often “recommended” for a reason—they are the best-performing and most satisfied franchisees in the system.

The franchisor’s Franchise Disclosure Document will include contact information for all current franchisees, and all former franchisees who left the system within the last year. Prospective franchisees should use this information to their advantage when performing their due diligence.

3. Not Performing Comparative Research

Some prospective franchisees will get caught up in the hype of a famous, new or trendy franchise opportunity, and as a result fail to consider alternate opportunities. Before focusing in on one particular franchise, prospective franchisees should investigate competitive offerings, and perform comparative research to make sure that their desired franchise stacks up with the competition from an investment perspective.

4. Not Investigating Vendors and Locations Before Signing the Franchise Agreement

In addition to investigating the franchisor, prospective franchisees should investigate the franchisor’s recommended (or mandatory) vendors, and should also begin to perform research on potential locations for their franchised outlet. These are additional factors that can have significant impact on the success or failure of a franchise, and the more prospective franchisees can inform themselves about these factors, the better able they will be to make an informed decision about whether to move forward with the franchise opportunity.

5. Not Attempting to Negotiate the Franchise Agreement

Finally, I see this less and less as time progresses, but some franchisors will still claim that they are “not allowed” to negotiate the franchise agreement. This antiquated notion is simply not true, and prospective franchisees should indeed attempt to engage in active and realistic negotiations with their franchisor in light of industry, system, experience, economic and other factors. While certain provisions will understandably be deemed non- negotiable, on the whole prospective franchisees with experienced counsel should be able to negotiate reasonable modifications that limit their risk exposure and enhance their overall chances for success.

Jeff Fabian is the owner of Fabian, LLC, a boutique intellectual property and business law firm serving new and established franchisors and franchisees. Contact the firm directly at 410.908.0883 or jeff@fabianlegal.com. You can also follow Jeff on Twitter @jsfabian.

This article is provided for informational purposes only, and does not constitute legal advice. Always consult an attorney before taking any action that may affect your legal rights or liabilities.

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Why I Have an Issue with the Forbes Franchise Rankings

The 5-Year Growth Rate and 5-Year Franchise Continuity are both great independent metrics of how a franchise is doing on average. As a potential franchisee both of these statistics are vital for selecting a franchise - you want to select a franchise that will provide you with a high return on investment and which will survive in the long run. I think these are, as FRANdata and Forbes suggested, two of the biggest (if not the two biggest) and most obvious metrics for whether or not a franchise is a “good” opportunity for a franchisee. But how do you use these to determine which franchise is BEST? This is the fundamental difficulty in coming up with a ranking system - it isn’t the difficulty in separating the good from the meh from the bad - it’s separating the great from the good and the best from the great. In the case of these rankings I found it to be pretty difficult to comprehend how they differentiated between the top ranked franchises. For instance, if you look at the difference between Discover Map (Forbes #4), Just Between Friends (Forbes #5), & Seniors Helping Seniors (Forbes #6) they all have extremely close continuity ratings and substantially different growth rates. In fact, in the case of these three, the overall rankings are opposite the growth rate rankings. Seniors Helping Seniors is ranked at the bottom of these three franchises despite having a growth rate that is 31 percentage points higher than Discovery Map and a continuity that is only 2 percentage points lower. This suggested to me that continuity was viewed as the dominant factor. But that logic didn’t hold for the rest on the “Economy Class” Top 10, as BrightStar Care (Forbes #7) had the same growth rate as Pop-a-Lock (Forbes #8) but a continuity rate that was 12 percentage points lower. These comparisons show that these were not the only two factors that went into the rankings, which is understandable, but no other factors that are explicitly listed in their results seem to be major factors.

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