What You Need to Know Before Buying a Franchise
Franchising is everywhere, and it is here to stay. From fast food, to home health care, there are few business sectors devoid of franchised concepts. However, while franchising is pervasive, there are many facets of franchising that are misunderstood by those preparing to enter the franchise world. While all franchise relationships are different, set forth below are several common franchise myths.
1. Franchisors are responsible for marketing.
While it is true that many franchisors engage in national or regional marketing efforts to further their brands, most franchisees are still required to engage in marketing and promotion of their franchises. Many franchisees are obligated to spend a certain level of funds on marketing each month, either individually or in local advertising cooperatives with other franchisees. Furthermore, while most franchisors collect periodic sums from their franchisees for marketing purposes, the typical franchise agreement gives franchisors complete discretion as to how and where those funds are used. There is no guaranty that marketing funds will be spent on any particular franchisee, in any geographical area, or on any particular type of media.
2. I can sell my franchise like any other business.
Many franchisors permit franchisees to sell their franchises, so long as the purchaser meets certain standards. However, most franchise agreements do not give franchisees an unfettered right to transfer, and most agreements set forth numerous conditions that must be satisfied prior to a transfer. Some franchise agreements contain rights of first refusal, which permit the franchisor to step into the shoes of any potential purchaser. Before entering into a franchise agreement, franchisees should carefully study their transfer rights, and any conditions associated with those rights. Without a complete understanding of the transfer requirements, franchisees cannot truly formulate their succession plans.
3. I can quit my franchise whenever I want.
Franchise agreements are valid and binding contracts, and they typically last 10 to 20 years. If a franchisee terminates the agreement prior to its natural expiration, and without the franchisor’s consent, the termination will in many instances be considered a breach of contract, entitling the franchisor to monetary damages. While it is possible to negotiate an early exit, franchisees must always remember that their franchise agreements are binding legal contracts.
4. Franchise agreements are non-negotiable.
Franchise agreements are important because they govern the relationship between franchisors and their franchisees. In order to maintain uniformity among the system, most franchisors do not volunteer to make changes to their agreements. However, despite popular belief, many franchisors are willing to make changes to their agreements, including changes to clarify ambiguities that can lead to disputes later in the relationship. Whether or not a franchisor will agree to modify a franchise agreement depends on a myriad of factors, such as the desirability of the franchisee, the size of the system, the nature of the changes requested, the expansion goals of the franchisor and other similar factors.
5. Protected territories provide absolute protection.
Many franchisees are afforded protected territories in their franchise agreements. However, there are wide variations among those protections. Many franchise agreements appear to provide protected territories, but do not. Some franchise agreements contain provisions that eliminate a franchisee’s protected territory, or reduce its scope, upon the happening of certain events. Other franchise agreements provide for the reduction or modification of territories in the franchisor’s discretion. Franchisees must be certain to understand the protections afforded to them. Not all territories are created equally, and the failure to accurately understand the protections can result in serious damages down the road.
6. Franchisors only make money if their franchisees make money.
Technically, franchisors can only succeed if their franchisees succeed. A franchisor without franchisees receives no ongoing royalty stream to sustain its operations. However, most franchisors also collect substantial initial fees at the outset of the franchise relationship. These initial fees vary from franchise to franchise, but typically amount to tens of thousands of dollars. These initial franchise fees are tied to “enlisting” new franchisees, and not the success of those franchisees. It is possible for a franchisor to survive for extended periods of time regardless of whether its existing franchises are successful. This is particularly true of franchise systems with rapid growth.
The above represent only a few of the common misconceptions regarding franchising. In order to dispel any confusion regarding the relationship and the franchise process, franchisees should always consult with competent counsel and other franchise industry professionals prior to signing a franchise agreement. I95