Hey Future Franchisees: What Do You Get When You Buy a Franchise?
So‚ this afternoon I received a call from a new franchisee (of course‚ for privacy reasons I cannot mention the persons name or the franchise involved – but‚ rest assured‚ this was a very real call) who was contacting me about problems with the a restaurant franchise that he purchased and established. He invested approximately $400‚000 (including franchise fee and buildout) in establishing a gourmet type fast-food restaurant. His business is in its third month of operation and he contacted me because he wanted to evaluate potential options about "getting out of his franchise agreement". Here are the issues he raised and my comments on the issue:
- COMPLAINT NUMBER 1 – "No Support" "My business is open for three months now and I have received no support. In fact my district manager has contacted me only once"
My Comment – Look when buying a franchise and selecting a franchisor in addition to a great concept‚ a great product or service and a solid brand you absolutely must ensure that you are working with a franchisor that is focused on supporting its franchisees. This has to do with initial training‚ post-launch support and marketing support. Also‚ you must realize that a franchisor cannot and will not do everything for you. So balance must be achieved between franchisor support and your responsibilities as a business person to actively market your new business.
- COMPLAINT NUMBER 2 – "I am Paying Franchise Fee and Ad Fund Fee with No Benefit". Specifically this franchisee complained that he was paying a royalty fee of 6% plus an advertising fund fee of 2%. So 8% of gross revenue went out the door and he believed that‚ in exchange‚ he received no benefit.
My Comment – Franchising is all about balance. That is‚ in exchange for a continuing royalty the franchisees should be afforded access to a valuable brand and business systems. In this case the franchisee does not recognize the value of the business systems and the brand itself which‚ by all accounts‚ appeared to me to be well developed. However‚ I would be curious to learn about issues of support and marketing initiatives. As to advertising fund fees‚ hereto‚ I would be curious as to the steps that the franchisor may or may not be taking. If you are considering the purchase of a franchise you do need to be aware of the impact of royalties and advertising fund fees when considering your franchise purchase. Of course‚ you must evaluate the benefits of the franchisors marketing efforts and systems‚ this includes web related media and websites.
- COMPLAINT NUMBER 3 – "My Original Attorney Isn't Calling Me Back". The franchisee mentioned that he was contacting me for two reasons. First‚ because someone suggested that he do so and second because his original attorney – the one who reviewed his franchise agreement – was not getting back to him. Also he mentioned that his lawyer was really not a franchise lawyer.
My Comment – When you buy a franchise you really need to be working with a lawyer who really understands franchise law. Your franchise lawyer needs to understand your goals‚ what you are doing and why you are doing it. This way‚ he or she can advise you of the legal issues and obligations that you will be undertaking (including‚ in this case‚ a 5% royalty and a 2% advertising fund fee) and provide you with a better "real world understanding". Look‚ many times I alert and absolutely advise my clients to assume that they will not be getting a tangible benefit from their ad fund fees. Then after making that assumption I ask them to evaluate their franchise purchase. By the way there is much‚ much more.
Also‚ your franchise lawyer need to understand that your franchise investment is a major event and that it is a process where you work together – not just "sign here and good luck".
There are many benefits to buying a franchise – provided that it is the right franchise. When you buy a franchise you need to follow a step-by-step process. I have seen this process many times and if you would like to learn more about how to buy a franchise, read An Entrepreneurs Guide to Buying a Franchise or contact us for more information.
By Charles Internicola May 21, 2013
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