So You Want to Buy a Franchise?

For many individuals seeking guidance in starting their own business, franchising can be an attractive alternative to launching an independent start-up. Franchising may offer an established brand, operational systems, and market recognition. However, becoming a franchisee requires careful evaluation of numerous legal, financial, and operational issues, some of which are discussed below.

What do you get for the money?

First and foremost, it is important to determine exactly what the franchise fee entitles you to receive. Does the franchisor provide accounting or bookkeeping services? Will the franchisor assist with site selection? Are opening inventory, equipment, or training included as part of the initial fee?

In addition, the initial franchise fee may not be the only cost owed to the franchisor. Many franchise agreements include ongoing royalties, advertising and promotional fees, and required purchases from approved vendors. All of these obligations must be evaluated to understand the full financial cost of owning the franchise.

Location, location, location

You must also determine the exact geographic rights granted under the franchise agreement. Is the franchisor permitted to open another franchise in a nearby location? Can your territory be reduced or modified? Do you have a right of first refusal to acquire adjacent territories?

Without adequate territorial protections, the value of your franchise may be diminished by competition from other franchise locations operating under the same brand.

Franchisor experience

One of the primary benefits of acquiring a franchise is gaining access to the experience of a business that has already navigated the risks and challenges of a start-up. As a result, franchisors often impose detailed operational requirements on franchisees.

A potential downside of this level of control is that it may not account for regional or market-specific differences. For example, products that sell well in the South may not perform as well in the Midwest. Advertising and marketing strategies may also vary by region or state. Franchise requirements may extend to store layout, branding, uniforms, and limitations on what products or services may be offered. Some degree of operational flexibility is often necessary to give the business a better chance of success.

Sales restrictions

Over time, a franchisee may develop strong relationships with customers, suppliers, and the surrounding community. This goodwill can represent significant value. However, many franchise agreements restrict a franchisee’s ability to sell the business to a third party who would otherwise be willing to pay for that goodwill.

In fact, some franchise agreements require the franchisee to sell the business back to the franchisor, often at or near the original purchase price. In such cases, the franchisee may receive little or no compensation for the time, effort, and resources invested in building the business. While these restrictions are common, franchise agreements should at least permit assignment to an heir or another qualified individual who has been involved in the business.

Some franchise agreements also impose time limitations on the franchise relationship. In certain cases, the franchise term may be as short as five years, with renewal rights controlled solely by the franchisor. As a result, a franchisee may invest substantial time, money, and effort into the business, only to risk losing the franchise if the franchisor declines to renew the agreement. This concern is especially significant when the franchise requires substantial capital investment.

As these issues demonstrate, becoming a franchisee requires careful analysis of many factors. While franchising can reduce some of the risks associated with starting a business, the terms and conditions of any franchise agreement must be thoroughly reviewed before moving forward. We welcome the opportunity to discuss these issues and others as you consider franchising as part of your entrepreneurial journey.