By Eric Bass

Buying a franchise can be a great way to start a business, but it is not the same as building a business from scratch. Franchises come with established systems, rules, and expectations that you should understand fully before getting involved. Based on our many years of work with both franchisors and franchisees, below are 11 tips I suggest you review before taking that leap to join a franchise.

1. Franchise Agreements are Usually Not Negotiable.

Franchisors have typically spent a great deal of time and money developing their brands and franchise systems. If they modify one franchise agreement for one franchisee, they risk having trouble with all others on the same issues and diluting their investments. Unless you plan to operate multiple locations or are joining a newer franchise system, you should assume the core terms of the franchise agreement are not negotiable.

2. You Have Little Control Over the Brand and Products/Services You Sell.

The Franchisor’s brand and consistency across their system is their main concern. Often, they require that you use certain vendors, suppliers, computer systems, and service providers. Since you may have little or no ability to select key vendors, take the time to understand who they are, what they charge, their relationship with the franchisor, and how they may affect your business. Be aware as well that the franchisor may change the required vendors at a later date and require you to use their new vendors.

3. Review all Supplier and Franchisor Fees and Royalties Carefully.

The Franchise Disclosure Documents and franchise agreements should have a list of expected royalties and fees that you will have to pay to the franchisor and its required vendors. Often there are more than just royalties, but also computer system fees, marketing fund fees, advertising fees, and other fees. Even small fees can add up quickly, so understanding the full cost structure is critical before making your investment.

4. You Likely Will Have to Attend Training.

Most franchisors require owners and key managers to attend training, often involving travel and significant time commitments. Even if you plan to hire managers and take a more hands-off approach, expect to have to learn the system from the ground up. The franchisor rightfully wants to be sure you can operate the business their way.

5. Check to See if Your Area is Protected from Competition.

Depending on the type of franchise, the franchisor may or may not grant you an exclusive territory where no other franchises are allowed. However, not all do so. Further, the franchisor may grant some limited territory protections for your business, but permit itself to sell products or services in the territory or online. Be aware of any competition you may face, even from the franchisor.

6. Expect Non-Compete Restrictions During and After the Franchise

The franchisor’s system and brand are its biggest assets. Thus, it will have to take measures to prevent competition. The franchisor will not permit you to learn their systems and then compete in the same area after your franchise terminates. Know that your competitive activities during and after the end of your franchise will be limited.

7. Your Business Entity Should be the Franchisee, Not You Personally

Form a business entity (corporation, LLC, etc.) to be the franchisee. You should not personally be the franchisee, but its owner. Otherwise, you have more personal risk in the operation of your franchise business from third parties and the franchisor, potentially. It is also best to set up this business early, so you sign all franchise agreement documents in the name of your business entity instead of your personal name.

8. Be Prepared to Sign Personal Guarantees.

While operating through an LLC or corporation provides important protections, most franchisors will still require personal guarantees. Also, any lease or loan you obtain for your business will likely require personal guarantees. Be sure to understand those obligations before moving forward.

9. Understand Your Exit Options Before You Enter

Often, franchisors give themselves the option to purchase your business at the end of the franchise term. This option can also often set the purchase price. Be sure to know how that price is determined early, as it can be set below fair market value.

10. Talk to Other Franchisees As Much as You Can

If you only follow one tip on this list, make it this one. As much as possible, use your due diligence time in examining the franchise opportunity to get to know as many existing franchisees as possible. They are the ones conducting the business on the ground now and will see the franchisor from your perspective. Prepare and ask lots of questions and do your best to find out how happy and involved they are, as well as how involved the franchisor is on their day-to-day business operations. These people will be “you” in the future if you choose that business, so get to know them now to be sure of your decision.

11. Review All of the Franchise Disclosure Document Carefully.

The Franchise Disclosure Document contains valuable information about the franchise system, including litigation history, bankruptcy filings, estimated startup costs, franchisee turnover, and contact information for current and former franchisees. Reviewing the FDD carefully—and with experienced legal counsel—can help you identify potential risks before you make a substantial investment.

Franchising can be a rewarding path to business ownership, but success starts with understanding the obligations that come with joining an established system. Taking the time to perform thorough due diligence today can help you avoid costly surprises tomorrow. If you are considering purchasing a franchise, the experienced attorneys at Venn Law Group can help you evaluate the opportunity and understand the commitments involved before you sign. Contact us today for more information.

S. Eric Bass is an attorney at Venn Law Group who holds both a law degree and MBA, providing him with a wealth of knowledge and insight regarding the challenges business owners face. He has more than 18 years’ experience in the areas of mergers and acquisitions, succession and exit planning, business partner agreements and issues, business formation, franchising, contract negotiations, strategic planning, and employment issues. Eric was recognized by U.S. News – Best Lawyers for 2019-2020 and The Best Lawyers in America in Employment Law – Management for 2019-2021.