Top Five Things to Think About When Buying a Franchised Business

In recent years, many individuals have sought to build wealth and leave a legacy by stepping beyond the traditional "9 to 5 job." This quest often leads to exploring new income streams or embarking on fresh business ventures. One popular and attractive option is acquiring a franchised business.  Franchised businesses offer many benefits to their owners, but purchasing the business of a franchisee raises several concerns that experienced counsel can help to manage.

What is a Franchise?

A franchise is a license granted by a franchisor that allows the franchisee to use the franchisor’s brand, business model, and products for a defined period, under specific terms outlined in a Franchise Disclosure Document (“FDD”).  The franchisor charges royalty fees and other payments from the franchisee.  The franchisee is also obligated to follow the franchisor’s rules of operations.  The fees and rules are outlined in the FDD and become part of the Franchise Agreement that the franchisee must sign. 

When an entrepreneur purchases the business of an existing franchisee, the purchaser must not only understand what assets are being purchased, but all the requirements that will apply going forward under the Franchise Agreement and the FDD. 

Key Considerations When Acquiring a Franchise:

1. The Business Model: One of the most important aspects of acquiring a franchise is understanding the business model you will be required to follow. The FDD outlines specific terms and conditions that dictate how you can operate your franchise. Franchisees must comply with these guidelines, oftentimes leaving little room for flexibility. Requirements can include mandatory marketing payments, owner-mandatory training and conference attendance, product purchasing requirements and operating standards. Therefore, it’s essential to determine if the franchisor’s business model aligns with your values, goals, and personal beliefs before committing to purchase a franchised business.
    
2. The Fees Associated with the Franchise: While a franchise may eliminate some of the start-up costs associated with building a business from the ground up, it’s essential to fully understand all the fees involved in the transaction and the ongoing operations. The FDD will outline various fees, including royalty payments, service fees, and transfer fees. While some fees (like transfer fees) may be negotiable, other ongoing fees (such as royalties) are typically fixed and non-negotiable. It’s critical to assess whether these fees will hinder your profitability in the long term and impact the financial viability of the franchise.
    
3. Reputation of the Franchised Business: Reputation extends beyond the brand name and product recognition—it also includes the current standing of the franchise itself. Investigate the reputation of both the franchisor and any existing franchisees. Look for any legal issues, disputes, or reputational damage that could affect the operation or the future stability of the business. Additionally, since the franchise agreement is a contract with terms that generally favor the franchisor, understanding the franchisor’s reputation for working with franchisees is crucial. A positive relationship between franchisor and franchisee can be a key factor in your success.
    
4. Training and Support. A main advantage of a acquiring a franchised business is the ongoing training and support provided by the franchisor. Review the FDD to ensure the franchisor offers adequate and ongoing support to help you succeed. Good franchisors provide comprehensive training, marketing assistance, and operational support, all of which will contribute to the overall success of your business.  Make sure that you will have the time to take all the mandatory training required by the FDD. 
    
5. Exit Potential. Understanding the exit strategy is essential in case the business the business relationship with the franchisor deteriorates. The FDD may outline any restrictions on selling or transferring the business, as well as any non-compete clauses that could limit your options if you decide to exit.  Your ability to sell the business will depend in part on how difficult it will be to find a buyer willing to assume the duties of the franchisee.  Therefore, it is important to have a thorough understanding of the terms and conditions regarding the sale or closure of your franchise, including the geographical scope and timing of any restrictions.

Acquiring a franchised business offers a pathway to entrepreneurship with established brand recognition and a proven business model, but it requires thorough research and careful consideration prior to purchase. Consulting an experienced attorney can help navigate potential pitfalls and ensure the franchise is a good fit for you.