Kemp Klein

So You Want to Buy a Franchise?

For many people who want guidance in starting their own business, franchising can be a great alternative. However, becoming a franchisee requires analysis of many issues, a few of which are discussed in this article.

What do you get for the money?

Foremost, you need to determine exactly what your franchise fee entitles you to. Does the franchisor provide accounting or bookkeeping services? Do they help you with site selection for your business? Do they provide you with opening inventory or the equipment needed to operate the business at the outset?

The initial franchise fee may not be the only fee that you may owe to the franchisor. There are often ongoing royalties, advertising and promotion costs, and required purchases. All of these must be evaluated in determining the full financial cost.

Location, location, location

Additionally, you need to determine the exact geographic rights that you are entitled to. Is the franchisor offering a franchise in a nearby location? Can your geographic location be reduced? Do you have a right of first refusal to acquire franchises in adjacent territories? Without some of these assurances, the value of your franchise may be diminished due to competing businesses.

Franchisor experience

One of the main benefits of acquiring a franchise is that you are buying the experience of a business that has gone through the trials and taken on the risks of a start-up. Therefore, the franchisor often has specific requirements as to how a franchisee operates its business. One of the problems with this type of control is that it may not take into account specific market or geographic issues. For instance, products that may sell well in the South, may not sell well in the Midwest. Further, advertising and marketing issues may vary from region to region and even from state to state. These requirements can also include store layout, use of logos, uniform requirements and, what can and cannot be sold. Some flexibility needs to be built into the operations of your business to provide a better chance of success.

Sales restrictions

During the existence of the franchise, you are likely to build up strong relationships and loyalty with customers, suppliers, and the community. This “goodwill” can add significant value to the business. However, many franchise agreements do not permit you to sell your franchise to a third party who would be willing to pay for the goodwill.

In fact, most franchises require you to resell to the franchisor at the original cost you paid for it. The result is that all your time, effort and energy that you put into the business is not compensated for. While this inability to sell your franchise to another person is often the case, you should be permitted to assign your franchise to an heir or other individual who has worked in the business.

Some franchise agreements put a time restriction on the franchise. In some cases it may last only five years and the franchisor, not the franchisee, has the right to renew the relationship. Therefore, you may expend a tremendous amount of time, effort, and money to build up a business, yet have the carpet pulled out from under you if the franchisor does not want to renew the relationship. This can be a significant concern if the franchise requires you to make significant capital expenditures.

As you can surmise, becoming a franchisee requires you to analyze numerous issues. While a franchise can often minimize your initial business risks, the terms and conditions of any franchise must be fully evaluated

before jumping in. We look forward to the opportunity to discuss these issues, as well as any others, as you embark on your entrepreneurial endeavor.

For further information regarding these matters please contact Kemp Klein.