The Franchisee Perspective: Be on the Lookout

I often receive calls from people who are looking to start their “own” business and have been talking to franchisors about buying into the franchisor’s system. They have a franchise agreement in front of them, and want an attorney to make a quick review, and explain one or two matters to them, so they can proceed to sign on the dotted line by some unfathomable deadline. In answer to my question as to whether or not they have reviewed the franchise disclosure document (FDD) provided by the franchisor, too often I am advised sheepishly that they have only made a cursory review of the FDD. Taking the time to read that 60 to 100 page document because it’s “too technical”, “too boring”, “not understandable”, “unnecessary”, etc., often seems too daunting a task.

It’s at this point that I give my caller some cautionary advice. It is a waste of your time and money to see me for a consult on the franchise until you have done some minimal homework. It takes hours to go through an entire FDD, and it is unreasonable to expect any meaningful advice in a one or two hour consult unless they have done at least three (3) things:

• Read the FDD and all attachments, including the franchise agreement, in their entirety;

• Marked the FDD and attachments, flagging items they do not understand or on which they need further clarification (preferably making a written list of all these matters); and

• Call and talk to least three (3) of each of the listed current and terminated franchisees disclosed in the FDD for their impressions of the franchise and the franchisor.

Here are just a few of the things they will learn by doing their homework:

• Who the franchisor is, what experience he has in the business, just what the business is, and the past or current problems the franchisor is experiencing;

• Upfront costs to start up and open the business, and what you will be paying on a weekly, monthly and/or annual basis to stay in business;

• The type of restrictions the franchisor is placing on the “approved” location, the products and services you can offer, and what other “profit centers” the franchisor has built into his system;

• Your obligations to the franchisor, both in-term and post-term, and your financial exposure if you fail to live up to those obligations;

• The obligations of the franchisor to provide initial and on-going assistance in the operation of the business, and to protect you from competition from both the franchisor’s own outlets and other franchisees’ outlets;

• The financial condition of the franchisor and whether the franchisor has the where-with-all to meet its continuing obligations.

Obviously, there is much more to the franchise relationship that needs to be considered, and you should take the time to understand what you are getting into. Doing the homework will increase the practical value of the consult, and you will be able to make a more reasoned decision as to whether to pursue the opportunity or to keep looking for one that better meets your expectations and objectives.