What’s In A Name? Learn The Basics Of Franchising.
Franchises and dealerships are part of a model that allows a franchisor to license their intellectual property and sell their goods and services through their franchisees or dealers.
When executed well, franchises can provide individual entrepreneurs with a proven business model and established brand presence. Because of this, franchises can be an attractive option to those seeking to own their own business.
However, when evaluating, operating and transferring these businesses, there are many considerations that franchisee owners should take into account. Like any investment, both risk and reward are involved.
Evaluating A Franchise
When evaluating a franchise, it is important to get an accurate picture of what you are purchasing. What will the initial investment costs be? How much are my ongoing expenses and fees? What revenue can I expect to see? Will I receive adequate training, support and assistance from the franchisor? Are existing franchisees happy?
- Franchise fees: Many franchisors require a significant initial franchise fee. Depending on the business, there may also be other significant initial startup fees and costs.
- Ongoing royalties and marketing fees: Most franchisors will require ongoing royalty fees and marketing fees from their franchisees. There may be other ongoing fees as well. These costs can take on different forms.
- Operating costs: These may vary by franchise but will include things like maintaining a brick-and-mortar location, ongoing inventory, human resources, legal fees, taxes and insurance costs.
- Initial investment: Franchisors must include an estimate of the initial investment costs in their franchise disclosure document (FDD). It is important that you review this document, as well as the franchise agreement and related documents, and seek franchise legal counsel before you purchase the franchise.
For any business, profitability is paramount. While every opportunity will be slightly different, there are ways to find out what you can expect. Looking at metrics regarding sales and location can help you determine what your expected return on investment (ROI) will be.
Talking to other franchisee owners can also help you get a better idea of the pulse of the market as well as day-to-day challenges and considerations, including whether they are happy with the franchise system and franchisor.
Because you are purchasing the right to use the franchisors’ systems, processes and know-how, understanding the level of training and support the franchisor will provide should be taken into consideration, especially if you do not have any experience in the industry of the franchise you are interested in buying.
Buying A Franchise
The process of buying a franchise will be different for every franchisor. However, some things you can expect to go through include:
- Applying to be an owner
- Applying for and securing financing
- Finding and renting a location
- Attending training
- Reviewing paperwork and contracts
Some of the most important documents that need to be reviewed and fully understood are the FDD and related documents. This set of documents gives in-depth information about the franchise, the key members of leadership, any litigation, the franchisor’s financials and more. It is a full disclosure of 23 required items containing details of the franchisor and the franchise system, and a current FDD must be provided to you at least 14 full days before you sign a binding agreement with or pay any monies to the franchisor or affiliate.
Because purchasing a franchise is a big decision and investment, it is important that you are diligent when evaluating a potential franchise opportunity. This includes retaining your own legal counsel with experience in this area of law. An experienced franchise law attorney can help you review and revise documents, advocate for your interests and negotiate with franchisors.
Operating A Franchise
Operating a successful franchise takes a great deal of work. It is important to utilize resources provided by franchisors, perform strategic planning, network with other owners, take advantage of marketing opportunities, stay informed about the analytics of your business and more.
Unforeseen Operational Challenges
Sometimes, challenges may arise that turn into disputes. In the franchise model, franchisees can experience operational challenges that stem from the actions and policies of their franchisors.
Common conflicts include disputes over:
- Unfair competition
- Tortious interference of business (when a franchisor is interfering with franchisees)
- Breach of contract
- Unfair deceptive trade practices
- Territory encroachment
When faced with any of these issues or any other disputes with the franchisor, it is important to understand what rights you have under your franchise agreement and applicable laws, and what options you have to contend with these challenges.
Selling A Franchise
The process of selling a franchise is different than selling an independent business. The franchisor must typically approve the buyer, and you must usually provide the franchisor with the right of first refusal, pay transfer fees and satisfy numerous other conditions that are set forth in the franchise agreement before the transaction can be completed.
Other Issues And Disputes
As a franchise operator, you have the opportunity to run your own business, make good money and benefit from a strong brand history and success. However, there are special considerations that come into play for franchisees.
Many unique issues come from dealing with franchisors, other franchisees and franchisee associations. These issues can lead to disputes that are not common in other types of businesses. Having our firm on your side can put your mind at ease, as we can address all legal issues that arise with your franchise business.
Talk To Us About Your Franchising Questions
For franchisees, legal help is a necessity. At Zarco Einhorn Salkowski & Brito, P.A., our attorneys have been nationally recognized as top-tier franchise law leaders. We remain committed to franchisees and have represented owners from some of the largest international franchises.
For more information or to schedule a consultation with a member of our legal team, call our office today at 305-374-5418 or toll-free at 800-299-4929. You can also contact us online. We are here to help you with all your franchising needs.