Austin TX Business Law Blog

Friday, January 2, 2015

The Advantages and Disadvantages of Buying a Franchise

Is a franchise right for you?

There are many ways to start a business, including buying a franchise. No matter which path you take for your start up, there  are advantages, disadvantages and legal challenges associated with each.

The person buying a franchise is called a franchisee. That person pays a certain amount of money up front, makes ongoing payments to the franchisor (the company that started the business) and promises to live up to the rules and conditions set forth in the franchise agreement. A franchise business provides the franchisee with a business model and normally supplies everything he or she needs to get started and maintain it.

There are a number of responsibilities and benefits that come with owning a franchise.  A prospective franchisee should be aware of the pros and cons of a franchise structure.   Though not an exhaustive list, following are some of the issues associated with a franchise business:

• Similar to an owner having substantial leeway to run his or her business, the franchisor also can have a lot of control over what he or she does. This can impact what a franchisee can do and generally would put limits on the franchisee' s control of the business operations.  If the franchisee does not like the color scheme, marketing or uniforms, they usually cannot be changed. Therefore, a franchise may not be the best form of business to pursue for a headstrong person accustomed to doing things his or her own way. 

• Just because it is a franchise does not mean it will require less work than starting a business from scratch. Even if a person buys a well known franchise, it does not mean people will be lined up at the door.

• Buying a franchise should be a lesser risk than starting a business from the ground up, but there are no guarantees. The franchisee can rely on the experience and support system of the franchisor. The franchisor would generally offer training for the franchisee and staff. The franchisee might also be able to take advantage of lower prices for supplies because the franchisor is buying in bulk and passing on the savings.

• Buying a franchise can be expensive and range from tens of thousands of dollars to over a million, though the upfront cost can vary widely depending on the franchise a person gets involved in. A person may need a wealthy partner or a healthy line of credit to get started. There are also ongoing fees normally based on a percentage of sales plus contributions to a marketing fund.

The key document in buying a franchise is the franchise agreement. It should spell out the rights and responsibilities of the parties and the penalties if the contract is breached. It is critical that you fully understand the agreement and its legal and financial impacts. The Kumar Law Firm can assist you in navigating these agreements and negotiate any changes.

If you are considering getting involved in a franchise, contact the Austin, Texas, business law and franchise attorney, Sanjeev Kumar, by calling (512)323-6060 for a consultation today.

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