4 Factors to Consider Before You Buy a Franchise
If you are considering the purchase of a franchise chances are that you have researched various franchise opportunities, spoke with sales representatives, received the franchisor’s disclosure document and possibly attended a “discovery day seminar” with the franchisor’s management team. Having reached this stage of the “franchise evaluation process” – before you sign any agreement or pay any deposit – there are a number of “due diligence” factors and information that you must consider and evaluate:
1. Franchise Relationships are “Contractual Relationships”
Before you invest substantial capital into a franchise system and become a franchisee you must understand the legal rights that you are acquiring and the obligations that you are undertaking as a franchisee. The terms of your franchise agreement are critically important and will have a substantial effect on the profitability of your business operations for many years to come. Learn more about reviewing the franchise agreement.
2. Franchise Agreements are Negotiable and Critical Modifications May be Achieved
Although many franchisors present franchise agreements as “formal” “non-negotiable” legal documents that cannot be modified or negotiated – this is not the case. Franchise agreements are commonly modified through an addendum process to implement substantial protections and rights for certain franchisees. Before signing a franchise agreement, review the terms of the agreement with your franchise lawyer and discuss potential rights (to protect your interests as a franchisee) that may be negotiated and added to your franchise agreement. Learn more about negotiating franchise agreements.
3. Don’t Ignore the Franchise Disclosure Document (“FDD”)
Under federal law – for your protection as a prospective franchisee – you must receive a copy of the franchisor’s “franchise disclosure document” (also known as an “FDD”) no less that 14 days prior to paying any fee or signing any franchise agreement. FDD’s are not just “legal documents” to be ignored but rather critical disclosures that serve as an important “life line” between making a good decision and a bad one. Spend the time to review the contents of the FDD and have the disclosures contained in the FDD by a franchise lawyer. Learn more about reviewing the FDD.
4. Contact Existing Franchisees
Existing franchisees (of the franchise system that you are evaluating), are critical sources of information. Before signing any franchise agreement review the list of existing franchisees (existing franchisees are identified and listed in “Item 20” of the franchise disclosure document) and contact as many franchisees as possible to question their satisfaction with the franchisor and the franchise system. Take franchisee complaints seriously.
If you are evaluating a franchise opportunity, learn more about our franchise review services.