When we assist prospective franchisees considering the purchase of a franchise, we review the Franchise Disclosure Document and Franchise Agreement. We want you to understand your legal obligations under the Franchise Agreement and other franchise requirements before you make the decision to purchase a franchise. We will provide you with our assessment of the information disclosed in the Franchise Disclosure Document and our assessment of your rights and obligations and the franchisor’s obligations to you under the Franchise Agreement by delivering to you a written memo and discussing it with you.
However, either before or while we are working on the legal assessment for you, there is other work we recommend that you do to evaluate the franchise purchase. These include:
(1) Speak with as many franchisees as you possibly can. Franchisees are a great, independent source of information. The FTC requires that franchisors include a list of all of their franchisees (names, addresses and phone numbers) as of the last fiscal year in the Franchise Disclosure Document so that you can speak with them. Ask questions such as:
– How was the initial training? Does it prepare you for operating the business?
– Was the actual cost of getting the business open in line with the estimated initial costs in Item 7 of the FDD?
– Are you satisfied with the timeliness and quality of the franchisor’s ongoing support?
– What is it like to manage and operate the business? What challenges have you faced?
– How difficult has it been to build up a customer base? What is your competition and what impact has it had on growing your business?
– Do prospective customers recognize the franchise brand?
– What have your annual revenues been? How long did it take to turn a profit?
– Would you purchase the franchise again if you had it to do all over again?
These are just examples of the topics that you will want to cover.
(2) Speak with any former franchisees. A list of the names and phone numbers of all franchisees who left in the previous fiscal year must be listed in the Franchise Disclosure Document. Ask former franchisees why they left the franchise system – was it for personal reasons or did it relate to the franchise business or the franchisor?
(3) Determine what the reputation is of the franchise system in the industry. Do potential customers or potential referral sources recognize the brand? Does the brand have a reputation for providing high quality products and/or services?
(4) Prepare a business plan. Your plan should be based on the information contained in the Franchise Disclosure Document, as well as your own independent investigation. It is recommended that this be done with a financial advisor. You need to determine if (i) you have sufficient capital available to invest in getting the business up and running and (ii) if this business is likely to provide you with the return on investment and the income that you need and want.
Business factors are often intertwined with the legal factors to be considered when deciding to purchase a franchise. We work with prospective franchisees to assist them in analyzing the information that they have gathered in the decision-making process.