Franchising
Franchises come in all shapes, sizes and business sectors. There are product and distribution franchises where the franchisor grants the franchisee a license to use its trademark to sell its products or services (e.g., Coca Cola, Goodyear Tire, etc.). There are business format franchises. These franchises have already established business formats, operating systems, marketing plans, etc. (e.g., Boston Pizza, Tim Hortons, etc.).
There are new franchises that you can acquire directly from the franchisor; or operating franchises you can purchase from existing franchisees (ordinarily subject to the franchisor’s approval). In other words, the choices are almost endless. So don’t be in too much of a hurry to decide.
Most new franchisees focus primarily on the franchise fee and location of the franchise. While these are no doubt important and necessary considerations, they are not sufficient. Take your time. Conduct your due diligence, either with a business broker, franchise lawyer and/or accountant. But do it.
Ask yourself the following questions before taking the plunge:
- What experience do you have running a business?
- What experience do you have in this business sector/market?
- Why specifically are you looking to buy a franchise rather than starting your own business or purchasing an existing one?
- How much do you know about this franchisor? This market?
- Have you spoken to other franchisees about their experience operating their franchise under this franchisor?
- What makes you think this franchise will work for you?
- How much money do you have to invest in a franchise? How much will you have to borrow?
- How long can you sustain operating the franchise without a pay cheque?
- How comfortable are you following someone else’s system? Someone else’s rules?
- What does your family think of you buying and operating a franchise?
- Have you taken the time to educate yourself thoroughly about the advantages and disadvantages of franchising generally, and this franchise opportunity in particular?
- Do you have an account? A Franchise lawyer?
- How equipped are you to negotiate the franchise terms?
Negotiating the Franchise Agreement
The first rule is this: Like most other commercial agreements, franchise agreements are negotiable. True, you are not likely to get MacDonald’s or Coca Cola to revise any of its franchise terms or conditions, but the vast number of available franchises are smaller and more nimble, open to reasonable negotiation. Don’t assume that you just have to accept the franchisor’s terms. The franchisor wants you as much – if not more – than you need it. Keep this cardinal rule in mind: There are many choices out there. Don’t fall in love too quickly.
The first opportunity you have to negotiate favourable terms is when you receive the franchisor’s Franchise Disclosure Document (FDD). READ IT CAREFULLY. The franchisor is required to provide this Document to you at least 14 days before signing the Franchise Agreement or paying the franchise fee. It must set out all material facts, financial statements, franchisor support and costs you will incur operating the franchise, in sufficient detail to enable the franchisee (you) to make an informed decision about purchasing and operating the franchise.
There is a lot to take in. Do yourself a favour. Read it carefully as we said, run the finances by your accountant, and both the FDD and Franchise Agreement by your franchise lawyer. It’s too late to do that once the Agreement is signed. And if at any point you discover that the franchisor failed to disclose important information which, if known, would have dissuaded you from signing the Agreement, or that it misrepresented material information, and you find the franchisor is not stepping up to help you resolve the problem, contact your franchise lawyer right away. Every day that passes will make it more difficult for you to find a quick and satisfactory resolution.
A franchise can be an exciting way to get into busy quickly with a network of marketing and support. It can also become your worst nightmare. As with most things in life, an ounce of prevention is worth a pound of cure.
Give Robaire a call for a free consultation.