Franchisor Validation

Franchise Buyer Beware! Caveat emptor!

Caveat-emptorWith any luck, your franchise buying experience while looking for the ideal franchise business for you, will be fun and exciting, and all the franchisors you talk with will be happy to welcome you into the fold, to support you as you contribute to the overall success of their company.

When you’re listening to sales pitches, though, “buyer beware.” You might be wise to keep a little bit of skepticism up front and centered in your mind.

Like virtually any business venture, the participating parties to a proposed Agreement will likely be adversarial. This is why we highly recommend every franchisee candidate hire a franchise attorney to help negotiate the franchise agreement.

We talked about assessing expectations a franchisor has for franchisees and what happens when you don’t meet expectations. But it’s important to reiterate that your franchise agreement is the only governing document for your own protection. If a franchisee doesn’t have protections written into the agreement, the franchisee won’t be protected if the deal turns sour. Courts have traditionally ruled in the favor of the franchisor because they are upholding a contract, even if it seems unfair.

It’s important to talk to other franchisees of a franchise you’re looking to open because they can tell you a lot about the inner workings of the franchise and how successful their system has been for them. However, you’ll also want to ask what struggles the franchisee has had with the franchisor. Nearly every franchisee has a problem, big or small, with their franchisor at some point. Find out how the franchisor dealt with the problem – their behavior in the past is a good indication of how they’ll behave in the future.

Watch out for arrangements that give franchisors extra revenue at the expense of the franchisee, such as making sweetheart deals with vendors that prevent franchisees from negotiating their own best deals. It can be hard to see difficulties of this kind up front – especially since special deals may actually be one of the perks of the franchise – but it’s worth watching for them.

We’re not talking here about fees; franchisees are still getting something in return for their money when they pay fees to the franchisor. With your franchise system you should receive a fair and equitable trade between your money and what services you get in return. Valuable brands will obviously cost more than an unknown one but that’s the name of the game—franchisors did a lot to build up a reputation and are allowing you to cash in on their work.

The problem is that it can be hard to identify areas where you need protection while you’re still in the warm fuzzy stage of being sold to. You need to read your franchise agreement thoroughly to see what sorts of protections you might have should things turn for the worse and new fees and costs be added to your franchise. Read Item 11 in the FDD closely and see what the franchisor will provide for your fees outlined in Item 6. Get help from a lawyer if you need it.

Your franchisor might change business practices, management styles or even management companies if they’re sold to another entity. While you might assume that what exists now will stay the same forever, your franchisor is going to be in a relationship with you for decades if your business is successful. You don’t want to put your work at risk.

A strong legal agreement lets you feel confident that – no matter what happens in the future – your relationship with the franchisor will be favorable for you, as well as for the company. That’s a sound foundation for friendship.

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