5 Factors to Consider Before Investing in a Franchise
If you’ve always dreamed of running your own business but find the thought of building an entire company from scratch too daunting, you might consider investing in a franchise. When you purchase a franchise, you get an already proven business model and brand, which can make the startup phase significantly easier. In addition to getting a reputable brand, most franchises also come with turnkey operating systems, extensive training programs, and ongoing support from the franchisor. That said, while franchises come with several advantages, they also have their own unique downsides, such as requiring you to abide by strict operational guidelines and pay ongoing royalty fees, so they aren’t the right fit for everyone. To determine whether investing in a franchise is the right move for you, do your homework and thoroughly research the franchise before signing on the dotted line. With this in mind, before you invest in a franchise, consider the following five factors to ensure the arrangement is worth the investment and the franchise systems are a suitable fit for your particular needs and temperament. 1. Determine the true cost of the franchise Unlike starting your own business, where all of the capital you invest goes directly to support your operations, a major portion of your initial investment in a franchise goes to the franchisor for licensing rights, training, and equipment. To determine the true cost of a franchise, carefully review the Franchise Disclosure Document (FDD), which franchisors are required by law to provide you with before you sign a franchise agreement. In addition to the startup costs and regular royalty payments, franchise agreements often contain hidden costs, such as fees for training, advertising, and special promotions. Yet since FDDs can be hundreds of pages long and include confusing terms and legalese, you should always have an experienced business lawyer like us review the agreement to ensure the deal is sound, worth the investment, and that you understand all of the terms that may be hidden in the fine print. To give you some idea of the complexities involved with running a franchise and to help you better understand the FDD, review the Federal Trade Commission’s (FTC) Consumer’s Guide to Buying a Franchise. 2. Find out what kind of systems and training are provided One of the primary advantages of purchasing a franchise is that you are investing in a proven business concept. However, not all franchises are created equal, so make sure the franchise you invest in comes with sound operational systems for everything needed to run the business on a daily basis, from inventory and equipment to marketing and payroll. Furthermore, the franchise should also come with adequate training and offer ongoing support to ensure you’ll be able to master these systems with minimal headaches. Most franchisors, for instance, provide both classroom and on-the-job training, which is typically conducted at the franchise headquarters or a separate training facility. Training can last from just a few days to several months, but the average franchisee training program can last two to four weeks. Having the proper systems and training can greatly increase your franchise’s chances of success, so make sure the operation you purchase offers robust support in these areas. 3. Determine the level of restrictions imposed by the franchisor Among the major drawbacks of franchises is the level of control and restrictions imposed by the franchisor. Most franchisors require franchisees to follow strict guidelines and abide by stringent standards for things like pricing, product offerings, operational hours, and store design. In most cases, you won’t be allowed to deviate from these rules and run things your own way, such as trying new marketing strategies or varying your product offerings. Although you may own the franchise, the franchisor typically maintains a significant level of control and requires you to do things their way. With this in mind, you’ll need to determine if you’re comfortable running a business within such a restrictive arrangement. 4. Research the market potential and competition in your location Before choosing a franchise, consider the local market and customer demographic. Determine what the local clientele and market will support both now and in the future. Also, research any potential competitors already doing business in the area. You may find that fellow franchisees are already operating in your vicinity. Indeed, some franchisors offer exclusive territory, while others don’t. And don’t just consider your geographic competition. You must also determine whether the franchisor is allowed to sell products on its own to local stores or via other distribution channels, setting itself up as your potential competitor. Some of the most reputable franchisors will help you do market research and select the best sites for your business, while others will even assist with lease negotiations. While owning a franchise will provide you with some built-in product recognition and customer loyalty during the startup phase, it’s critical that you research the market to ensure demand for your product or service will survive and continue to grow into the future. 5. Consider setting up an LLC or corporation As with running any business, owning a franchise sets you up for potential liability. Without the proper entity set up, there’s no separation between your business and personal assets, so your personal assets would be up for grabs in the event your franchise goes into serious debt or is hit with a lawsuit. Given this risk, consider structuring your franchise as a limited liability company (LLC) or a corporation to shield your personal assets from liabilities incurred by your business. When properly set up and maintained, these entities establish your company as a separate legal entity distinct from you as an individual, preventing you from being held personally liable for the franchise’s debts or legal disputes. In addition, if you might sell your franchise in the future (if a future sale is permitted by your franchise agreement), plan for that now by setting up your business entity to qualify you for up to $10 million of exemption from capital gains tax upon the sale. Just be sure to call us before you start any business, so we can ensure you start it right from the very beginning to maximize future tax savings with strategies like this. Meet with us, your Family Business Lawyer™ for help selecting, setting up, and maintaining the entity structure that’s best suited for your business. Enlist Our Support Before Sealing the Deal Investing in a popular franchise can seem like a sure-fire way to realize your dreams of owning a business. But no business is without its risks and drawbacks. With this in mind, don’t let your hopes and dreams keep you from conducting the proper research and planning. As a Family Business Lawyer™, we will assist you in reviewing the franchise agreement to make sure you’re getting the best deal possible and are aware of all hidden costs and restrictions. Additionally, we will support you in reviewing the franchisor’s terms related to contract termination, contract renewal, and conflict resolution to ensure you don’t encounter any significant disputes down the road. Finally, as a Family Business Lawyer™, we can help you set up and maintain the proper business entity to ensure your personal assets aren’t at risk in the event your franchise is sued or goes into debt. Contact us, your Family Business Lawyer™ today to schedule an appointment.
This article is a service of Hanson Legal and Milan Hanson, Family Business Lawyer™. We offer a complete spectrum of legal services for businesses and can help you make the wisest choices on how to deal with your business throughout life and in the event of your death. We also offer a LIFT Start-Up Session™ or a LIFT Audit for an ongoing business, which includes a review of all the legal, financial, and tax systems you need for your business. Call us at 541-776-3405 today to schedule!