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Considering Becoming a Franchisee? Do Your Due Diligence!

April 20, 2015

Posted in Business Litigation, Business Start Ups, Partnership Law

Starting a franchise can be a good way to get into business or add a new business if you already own one. Many franchisors offer turnkey operations and spell out what you should do, and how you should do it, to help you make your business a success. You need to do your due diligence when exploring if a franchise is right for you and if so which one. You need to know all the relevant facts to make an informed decision before you invest your time, money and energy into a franchise. Finding those facts is the topic of a recent Entrepreneur magazine article.

To get the facts needed to make the right decision author Ann Wilds makes these suggestions:

  1. Respect the discovery process.

Do your homework. Understand how the franchise would work and the potential market in your area. Learn about the positives and negatives of this type of business. Be well informed so you’re prepared to…

  1. Prepare questions for other franchisees.

Start with ten to twelve good, meaningful questions to learn about the franchisor’s training and support mechanisms, its processes, the business model and marketing strategy. One good question is, “What’s a day in the life of a franchisee like?”

  1. Speak with five or more franchisees.

Get to the bottom of the reality of running these businesses to go beyond the sales pitch from the franchisor. What kind of investment of your time, energy and money should you expect? What kind of return on your investment should you expect? What are the major problems they face? How can they be resolved? How helpful or unhelpful is the franchisor? How good is their training?

  1. Look for trends.

Is business improving, decreasing or staying level? Has the relationship with the franchisor and the market for the product or service improved or worsened over time? If the views of one or a few franchisees are outliers, positive or negative, see if this individual is doing what he or she was trained to do and if they’re following the systems that are supposed to lower costs and increase revenue. Why is this person’s situation or opinion not the norm? This can help you decide if there are issues you should investigate further.

  1. Know your numbers.

Everyone has different skill sets and despite taking the same training, there will be differences when it comes to executing the business plan and the financial results. What are the key performance indicators used to monitor their businesses? What drives revenue and how long does it takes to break even? Analyze the information you’ve received and make projections of what you think you can achieve.

Any number of laws could impact your business, whether it’s a franchise or not. Federal, state and local laws and regulations will impact your business, possibly drive up your costs and blunt the return on your investment. We can help you learn about the legal issues of your proposed business. In addition, no matter what franchise you’re considering or how successful you think it might be, it’s critical you understand the franchise agreement. It will spell out the rights and responsibilities of both parties. Language by the franchisor could put more risk and expense on you than is necessary. Negotiations could lead to more favorable contract language and an increased chance for your success.

If you want to learn about business law and how it impacts franchising, or you’re currently a franchisee and have questions about your legal rights, contact our office so we can discuss the situation and your options.