If you are thinking about buying a franchise, the decisions you make now could have significant consequences for the success or failure of your business down the road. From choosing the best franchise opportunity for your personal traits to negotiating critical protections into your franchise agreement, the more effort you put into making a smart purchase, the less likely you are to face unwanted surprises once you are contractually bound to your franchisor.
So, what mistakes do you need to avoid when buying a franchise?
1. Buying Based on Emotion
When buying a franchise, your decision needs to be based on your belief in your ability to succeed as a franchisee. If you buy into a trending market or get wooed by a trade show booth display, you may find yourself wishing that you hadn’t rushed into the “opportunity.” Think about the type of business you want to run, research the franchise system and its competitors, prepare your financial projections, and then decide whether you want to move forward.
2. Not Speaking with Current and Former Franchisees
When looking for information about a franchise opportunity, some of your best resources will be current and former franchisees. While current franchisees can tell you what it is like to be a part of the system today, former franchisees will be able to tell you why they left, how the franchisor handled their termination, and what they wish they had known before they bought in.
3. Not Reviewing the Franchise Disclosure Document (FDD)
By law, a franchisor must provide you with a copy of its Franchise Disclosure Document (FDD) a minimum of 14 calendar days before you sign a franchise agreement. Carefully reviewing the FDD can provide you with a wealth of insights, not only based on the information it contains, but also based on the information it doesn’t. What is your estimated initial investment? Has the franchisor taken appropriate measures to protect its trademarks? Is the franchise system growing or contracting? These are just a few of the key questions that should be answered in the FDD.
4. Not Negotiating Your Franchise Agreement
Franchise agreements are almost universally heavily one-sided in favor of the franchisor. If you sign your franchise agreement “as-is,” you will likely be leaving some critical protections on the table. While some franchisors are more willing to negotiate than others, it doesn’t hurt to request reasonable changes; and, if you run into issues down the road, you may find that the protections you negotiated are exactly what you need.
5. Relying Solely on Information Provided by the Franchisor
As a prospective franchisee, you need to conduct your due diligence. This means going well beyond the franchisor’s sales pitches and promotional materials, and seeking out other sources of information in order to make an informed buying decision. Along with contacting current and former franchisees, thorough due diligence will also typically include evaluating competing franchise opportunities, considering different financing options, consulting your financial advisor, visiting the franchisor’s headquarters and asking specific questions about the opportunity, doing research online, and seeking advice from an experienced franchise attorney.