Starting a new business can be challenging. A new business owner is often not only the chief executive officer but the janitor as well. A new business owner is burdened with many obstacles, including federal, state, and local laws and regulations, capital requirements, cash flow, and gaining business savvy. On top of those responsibilities, there are more personal unknowns to deal
with, such as personal health issues, accidents, death, divorce, marriage, the economy, and pandemics.
Buying a franchise can make your entrepreneurial journey go a bit smoother, from the beginning and onward. A franchisee benefits from operating a business with the franchisor’s research, development, operating history, name-brand recognition, products, and services. A franchisee also has a license to use the franchisor’s trademark(s), operations, and procedures, all with the franchisor’s support.
When you purchase a franchise, life’s other issues can be easier to overcome. The whole concept of franchising is a repeatable business model. Instead of reinventing the wheel, the franchised business format services or the traditional or product distribution franchise is a tried-and-true system based on the franchisor’s business model.
Choosing the type of franchise business that fits your desires and abilities is the first consideration because there are franchises in virtually every sector of business, (e.g., automotive services, hotels, restaurants, healthcare, fitness, education, and residential services). Then, research the particular franchise that best fits your standards and evaluate competitors in the marketplace. It may be helpful to get the advice of a professional franchise consultant to help you complete your due diligence.
Once you have decided on a franchise, you can obtain the franchise disclosure document, franchise agreement, and related agreements (collectively, the “FDD”) for the particular franchised
business you have chosen. The FDD is a document required by the Federal Trade Commission known as the FTC Franchise Rule (several states have additional rules). The FTC Franchise Rule imposes pre-sale disclosure obligations and restrictions on a franchisor, but it also requires the franchisor to provide important disclosures/information to potential franchisees. The FDD must be read in detail by you, your lawyer, accountant, and financial advisor to understand the contractual obligations and costs of buying and operating the franchise.
The FDD will disclose a wealth of knowledge about the franchisor, including:
– The franchisor’s length of time in business
– Key business persons involved in the franchise
– Business operations, support, and services provided by the franchisor to the franchisee
– Any lawsuits among the franchisor and other franchisees
– The number of franchises sold ; and
– A list of all franchisees and their contact information so you can contact them.
Many FDD’s even give you an idea of how much money a franchisee can make.
The next critical piece of the due diligence process is discussing past and current franchisees’ relationships with the particular franchisor. Relationships are an essential part of franchising. You should discuss the franchisor’s brand value, how well the franchisor supports its franchisees, and whether the franchisor meets its delivery and support obligations.
Finally, if you are considering purchasing a franchise, you should be ready to comply with the laws, regulations, and multiple contractual issues that go along with it.
From a legal perspective, franchising is a contractual relationship between a licensor/franchisor and a licensee/franchisee that allows you, the business owner, to use the franchisor’s brand and methods of doing business. The documentation contains all of the franchisee’s duties and rights under the franchise. Therein lies the reason you should get the support of a qualified lawyer who knows franchising and will help you with the legal analysis.