What is The Best Franchise Model For You?

Today, approximately 35 percent of franchises are owned solely or co-owned by women and that percentage is steadily increasing. Women’s superior relationship skills shine in service businesses and women gravitate toward more female oriented franchise models such as hair salons, weight loss centers, flower shops, cosmetic companies, etc. Driven by the desire to start a small business in order to create more flexibility and control over their time and to be their own boss, the franchising model is an exciting lure. Caution, however, speed bumps abound. Your entrepreneurial zeal should be tempered with a reality knowledge check which includes due diligence performed by you, number crunching services performed by your accountant and perspective and legal advice provided by your attorney.

What to Expect from Franchise System

Although the franchise model is no guarantee, the model may increase your chance of staying in business. The Small Business Administration, however, has consistently found that franchises have the same success rates as independent small businesses. Businesses fail for many reasons, some of which the franchise model cannot fix.  A good franchisor should eliminate, control, or manage many of the common mistakes a starting small business makes.  At the minimum for the initial investment and recurring costs of royalty and marketing monthly fees, a franchisee should receive brand recognition (trademarks, advertising and promotion), quality control, site selection and opening support, continuing training and operational guidance, stability, and value for the investment.

Information regarding these critical facts should be obtained by a careful review of the disclosure statements required by the Federal Trade Commission Franchise Rule (FTC Rule) and applicable state required documents (collectively “Disclosure Documents”). The FTC Rule requires 23 specific disclosure items, inclusion of the franchisor’s financial statements, the contract the franchisee is being asked to sign, contact information of existing franchisees in the system, personal guaranties to be signed and more.  Additionally, there are 15 states that  require pre-sale registration of the franchise offering statement with a state agency.

Your Due Diligence

If you have a passion for a certain type of business, and have found a model that you think will work, you need to perform as much due diligence as possible with the particular franchise system and model. Understand the Disclosure Documents, work in the business industry (if you don’t like what you are selling, you will fail), and visit with existing and terminated franchisees (from the Disclosure Documents, you will find the names and addresses). Check rival franchisors’ information and compare Disclosure Documents. Spend time determining the credibility, longevity, and seasoning of the franchisor, given you are paying for the franchisor’s experience, honesty and past performance. Keep in mind that many franchisors are startups themselves and may go out of business in a few years.

Accountant Input

Sit down with your accountant and ask him/her to review the franchisor’s numbers as to what it will “realistically” take in capital to start and maintain the business in the first couple of long lean years. You need to have an economic sense of the investment, including whether extensive remodeling may be acquired, whether the property where the unit is located will be leased or owned, whether there will be sufficient time to recoup the investment if the franchise is for a limited time. You will generally need to locate financing sources for the initial investment and working capital for at least the first year of operation. For example, the initial franchise fee can range from $2,500 to $90,000 and the initial total investment can range from $35,000 to $2 million.

Attorney Guidance and Negotiation

Your attorney will help you evaluate the fairness of the deal from your point of view considering such key questions as:

1. Whether you have an exclusive or nonexclusive territory and the significance of same;
2. What controls the franchisor has over you as to the purchase of supplies, hours of operation, and choice of personnel, etc.;
3. The specifications of your franchise term and whether your renewal rights are reasonable (remember, you are licensing a business model, you do not own it);
4. The ramifications of the non-compete;
5. What fees (initial amount or down stroke), royalties and advertising fees are due and how are they paid;
6. Under what grounds may a franchisor terminate the franchise relationship and whether you are given a notice of default and opportunity to cure; and finally
7. Under what conditions you will be able to transfer your franchisee rights to a third party.

Conclusion

If you are looking to own your own small business, the franchise model may be right for you. You must, however, choose the particular franchise model and franchisor with a great deal of thought and research.

Posted by Attorney Ruth Binger. Binger serves both emerging and mature businesses concentrating in corporate law, intellectual property and technology law, cybersecurity, digital media law, and labor and employment law. Her commitment to the success of small to medium-sized businesses, and her understanding of multi-faceted issues inherent in operations, are what distinguish Binger’s practice.

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