Franchising My Way

For those beginning to investigate buying a franchise, a word of caution: Take no further action, until you've read the following. We have seen innocent people scammed and financially hurt by business license frauds. If something sounds too good to be true, trust your gut. 

Franchise Risks

We understand the allure of low-cost entry into business-ownership. The initial investment franchise opportunity in group fitness might be as low as $2,500 and a major fast food chain could be over one million dollars. Indeed, there are benefits to buying into an established franchise:

• Brand-recognition.
• Customer loyalty.
• Growth opportunity in a geographic area.
• Business and technical support.

There are also risks that many who eager to own a business overlook or couldn't know based on the finer points of contract law. When you are considering owning a franchise in fast food, printing and packaging or convenience stores, you should also consider some of the restrictions which may pose risks to your financial future:

Exclusive territory: A franchise agreement does not grant you exclusive rights to a geographic location. You could be facing competition down the road — literally and figuratively.

Mandatory suppliers: Franchisors often require that you make mandatory purchases with their suppliers. The prices can be higher and the franchisor receives rebates from these vendors. However, you won't be able to find a more cost-effective supplier under this clause.

Renewal fee: A franchise agreement has a term limit. At the time of renewal, all of the fees including franchise fee, royalty fee, advertising fee, equipment, inventory and training costs go up. In fact, a renewal fee may be part of the transaction. 

Transfer: Selling a franchise should be to your advantage. Make sure that you have the ability to reasonably sell the location without burdensome conditions. Also, if the franchisor has Right of First Refusal, they can swoop in and take a deal away from another buyer.

Ordinarily, prospective buyers do not have the legal expertise to request a Franchise Disclosure Document (FDD) that meets the Federal Trade Commission's updated Franchise Rules. For more information on each of the 23 specific items of information that should be included, read our article on buying or starting a franchise.

Next steps to buying a franchise

You now have some idea of the risks associated with buying a franchise, especially one with no-name recognition. Here are five helpful next steps to licensing a business:

1. Hire a franchise litigation lawyer.
2. Perform due diligence on the franchisor.
3. Meet often with the franchisor or field representative to discuss details.
4. Obtain a FDD.
5. Negotiate everything.

An experienced business attorney familiar with franchising will be able to help ensure that you are franchising 'your way.' The Law Offices of Donald W. Hudspeth, P.C. offers expert, business-savvy legal counsel for potential and current franchise owners. Contact us online, by phone at 602-265-7997 or toll free at 866-696-2033.

Categorised in: Starting a Business in Arizona

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