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March 10, 2011

Venue Provisions in Franchise Agreements

There are countless franchise opportunities available to San Diego entrepreneurs.  The majority of these opportunities are offered by out of state franchise companies.  Purchasing and operating a franchise can be a lucrative option for those looking for alternatives to starting a new business from scratch.  Franchises offer economies of scale, proven systems and existing markets.  It is a known quantity that is typically well marketed, often nationally.  These advantages are obvious.  However, franchising is not a guaranty of success.  Much depends on the geographic location of the franchise, the proximity to other franchises, the proximity of similar businesses, the market for the franchises goods or services in the area, the economy and the skill and commitment of the franchisee.  When lucrative, franchises rarely result in conflict and the terms of the franchise agreement seem less important.  When the franchise is not profitable for whatever reason, the terms of the franchise agreement become critical.    

27833_stores_windows.jpgVirtually all franchise agreements include a venue provision wherein any litigation and/or arbitration will be heard in the home state of the franchisor.  For San Diegans, this means somewhere other than California.  This is of course problematic especially for the small businesses with limited resources.  Litigating or arbitrating a case in a distant jurisdiction is more costly and time consuming than it would otherwise be here in San Diego.  In many cases, franchisees are simply priced out of the process and have little recourse but to try and negotiate some sort of reasonable solution with the franchisor in lieu of facing a default judgment and/or bankruptcy.  

Unfortunately for franchisees, it is almost always impossible to negotiate away venue provisions in franchise agreements.   This is particularly true with national chains.  Venue provisions provide the national chains legal consistency, and it's the rare circumstance that they would be willing to give up this important benefit.  Nonetheless, it's important for franchisees to discuss the matter with their business attorney and/or try to negotiate the provision's removal.  Understanding the consequences of the provision better prepares the franchisee should a dispute later arise with the franchisor.  It also provides the franchisee the opportunity to explore other options.  Selecting a franchise located in one's home state is a better option all other factors being equal.  If you are considering the purchase of a franchise, consult a San Diego franchise attorney for assistance.
September 17, 2010

Geographic Considerations in Choosing a Franchise

The decision whether to purchase a franchise requires thoughtful consideration of numerous factors.  It is common for prospective purchasers to be blinded by the success of the franchise's national reputation.  A national reputation with hundreds of profitable locations, however, does not guarantee that every potential location will be profitable.  Before making the decision to buy a franchise, prospective franchisees should carefully examine the demographics of the proposed location.  

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Take for example, a successful franchised sandwich shop located in Chula Vista's Terra Nova Plaza at the intersection of East H Street and the 805 freeway.  This is a high traffic location that some commercial tenants have classified as an "A" center.  While this is a hypothetical example, there can be little doubt that a national franchised sandwich shop in this mall will be profitable, perhaps extremely profitable.  Put that same franchise in one of Chula Vista's Eastlake or Otay Ranch shopping areas and you will almost certainly show a different result.  While these communities are rich, diverse and beautiful, they have suffered greatly from the current struggling real estate market.  This writer is convinced that Eastlake and Otay Ranch will recover and thrive, but for now business owners in the area have accepted their reality.  This is not to say that the national franchised sandwich shop cannot be successful there. It merely is to suggest that a prospective franchisee would be unwise to move forward without seriously considering this economic reality.
 
Of course, this example is dependent on recessionary factors.  Other demographics may prove important to the sandwich shop's success.  There may be less demand for a sandwich product in minority communities like San Ysidro and more upscale communities like La Jolla.  It will also likely be more successful in high traffic business centers such as downtown San Diego.  The point is to evaluate the demographics before assuming the franchise will be successful.
September 8, 2010

To Franchise or Not To Franchise

As with the purchase of any business, purchasing a franchise in San Diego requires careful consideration of the company, its operations and profitability and the economic climate.  Franchise opportunities abound and they offer purchasers the unique ability to operate a business using an existing and successful business model.  With proven systems already in place, it is generally easier to operate a franchise than to start a new business.  However, the franchise model does not guarantee success.  Different markets, unfamiliarity with the business type, economic swings, geographic differences and other factors can combine to ensure failure in one locality where another thrives.   This article briefly addresses some of the more important considerations prospective purchasers should look at before making the decision to buy a franchise.  

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Most importantly, the prospective purchaser should learn as much about the franchise as possible.  It is important to analyze the franchise disclosure carefully, to contact existing franchise owners and to visit the franchise headquarters.  Ask the following questions: How many individual franchises are there?  What type of training is offered?  What is the company's reputation?  What are the typical profit margins?  What are the company's plans for growth?  The answers to these questions help to inform the ultimate decision.  In addition, the prospective purchaser should perform its own a market analysis.  An independent evaluation will look at the uniqueness of the product or service, the vulnerability of the business to market fluctuations and the franchise's historical profitability.  If a thorough independent evaluation isn't practical, at least take a look at the differences and similarities between the proposed location and other successful locations.  If the demographics are completely different, it could be a red flag requiring heightened scrutiny.  

Armed with an in-depth understanding of the business model, the prospective purchases can next consider whether the purchase of the particular proposed franchise makes sense for them individually.  What level of expertise do they have in the particular business?  What kind of start-up capital is required and how might they raise it?  What are the franchise fees and will the profit margins be high enough to cover them?  How long will it take to recoup the initial franchise fees?  What is the term of the franchise agreement?  What are the franchise's operational requirements?  What about leasing obligations?  It isn't wise to take short cuts when answering these questions.  Where possible, enlist the services of an accountant, business attorney and/or financial advisor with experience in assisting clients with franchise businesses.

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