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.  

298482_shopping_centre_3.jpgMost 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.

Ultimately, the franchise agreement will govern your relationship with the franchisor.  As with any contract, your bargaining power will dictate your ability to negotiate the best terms possible.  In the franchise context, franchisors are typically unwilling to make changes to their form agreements.  However, this doesn’t mean there is no room for negotiation, particularly in poorer economic climates.  The franchise would rather sell another franchise than not.  If you are an appealing prospect, they will work with you where possible.  Be wary of franchises that tell you it is illegal for them to negotiate.  It’s absurd of course, but some make the claim.  They are simply required by law to disclose any changes to their other franchisees and they don’t like to do this.  A prospective purchaser’s biggest bargaining chip is their ability to decline the offer.  There are other business opportunities, including other franchises, and savvy business people understand the significance of stepping away from a bad deal.  

This article is not intended to dissuade folks from pursuing franchise opportunities.  They can be extremely lucrative.  Rather, it serves to assist prospective purchasers in better evaluating the investment.  Working with a franchise lawyer ensures that purchasers negotiate the best possible terms, and should they choose to move forward, better understand their rights and obligations under the franchise agreement.

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