If you are considering purchasing a franchise, it is important to compare competing franchise opportunities as part of the due diligence process. Some prospective franchisees choose a brand they want to pursue but fail to do the work necessary to determine whether there are better opportunities available to them. Below are several items prospective franchisees should consider to make an informed decision for purchasing a franchise.
1. Franchisor History and Executive Experience – When comparing franchise opportunities, it is worth spending some time reviewing each franchisor’s Franchise Disclosure Document (“FDD”) to learn about its leader’s experience both with the brand and within franchising in general.
2. Royalties, Marketing Contributions, and Other Fees Paid to Franchisor – As a franchisee, your royalties and marketing fund contributions will affect your profitability. While there are some general standards within franchising, even one percent of gross revenue can make a big difference. Similarly, if one franchisor’s renewal or transfer fees are higher than another competing franchise, this is a factor you should consider when choosing which opportunity to pursue.
3. Designated Suppliers and Mandatory Purchasers – In addition to royalties, marketing fund contributions, and other fees paid to the franchisor, the costs of using designated suppliers and making mandatory purchases can also limit your profitability as a franchisee. Since designated suppliers know they are going to get a prospective franchisee’s business, they do not necessarily have to compete with the prices franchisees could pay on the open market. These types of purchasing restrictions can limit a prospective franchisee’s autonomy and cause them to select a different franchise opportunity. Some franchisors may be willing to negotiate a franchisee’s use of other suppliers, but only with the franchisor’s express written consent.
4. Territory Rights and Restrictions – Territory rights and restrictions can vary widely between competing franchise systems. As a prospective franchisee, it is important to assure you have satisfactory territory protections. When comparing franchise opportunities, you will want to carefully compare the territory rights and restrictions outlined in the FDD and in the franchise agreement. In addition to the size of your territory, a prospective franchisee will want to consider their territory exclusivity, development of other territories, franchisor and franchisee competition, exceptions to any territory protections, and restrictions on marketing or selling outside of your territory.
5. Customer and Franchisee Satisfaction – As a prospective franchisee, you should speak with as many franchise owners or potential owners as possible to properly evaluate the franchise and determine if the franchise system is a good fit. In doing so, you will be able to learn about their experiences with the franchisor and the help, or lack thereof, given to them with the opening of their franchise and ongoing operation. Prospective franchisees should receive current and former franchisees’ contact information as part of the FDD.
Finally, to make an informed decision about the choice of potential franchise opportunities, you will want to carefully review the terms of the franchise agreement with a franchise attorney. A franchise attorney can assist by informing a prospective franchisee of all the contractual risks that may be unique to a particular franchisor. A franchise attorney can also assist the prospective franchisee to be fully informed before any meetings with a franchisor’s leadership team to learn more about the franchise opportunity.
If you are researching potential franchise opportunities and need assistance to make an informed buying decision, please contact franchise attorney Dave Nelson at [email protected] to discuss your options.