5 Traps for the Unwary Prospective Franchisee
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 email@example.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.
Talking with Current Franchise Owners
Reading through a FDD is a key part of your research, but it can’t answer all the potential questions you might have about how it is to actually operate a given franchise. The best way to do this is actually to start talking to current franchisees. The best way is to this is to call or visit a franchisee, don’t just email them. You might need to be a bit persistent, but if you are then you can get all of your questions and concerns answered.
Is There A Duty Of Competence in Franchising?
Think about the last time you hired a plumber or an auto mechanic, or a lawyer for that matter. Without asking, you probably knew that the person you hired owed you a legal duty to perform the job in a competent manner consistent with the standards of his or her profession. The same is true when you bought a new car or built a new house. You rightly expected that the seller would stand behind its responsibility.
Follow the System
While these franchisees might think they are helping the brand, in fact it’s just the opposite.