Austin TX Business Law Blog

Sunday, August 21, 2016

Pros and Cons of Buying a Franchise

Is purchasing a franchise a good idea for you?

For people who want to start businesses but are worried about the risk involved, franchises may sound like the answer to their prayers. Theoretically, franchises follow well-established, successful models that have already proven to be effective. The franchisee is supposed to be supplied with the appropriate quantity of tried and true products and accessories necessary to create a successful business. He or she feels assured of customers because production, pricing, advertising, and marketing strategies are already in place.

Unfortunately, while starting a business from scratch is risky, purchasing a franchise can be risky too. A 2015 article in Forbes vividly depicted the difficulties the sandwich franchise Quiznos got into when it had to settle class action suits to the tune of $206 million brought by franchisees who accused the chain of overselling its markets and marking up its prices excessively.

Preparing Yourself to be a Successful Franchisee

Experts in the field recommend the following steps to prepare for success with a franchise:

  • Assess Your Temperament and Skill Sets

    Creative, inventive types are not likely to be able to handle the constraints of a franchise. It is not an accident that veterans tend to run successful franchises since these individuals have been trained to follow rules and regimentation. The whole concept of a franchise is based on following regulations and not experimenting. Also consider the following: Will you be competent at selling? Promoting efficiency? Getting along with employees? Have you had experience in the field you are thinking of entering?

  • Educate Yourself about the Field

    Even though you will receive some training going in, it is important to be familiar with the basic aspects and technologies of the business you intend to purchase. Many experts recommend that you actually work in one of the stores you're thinking of franchising for 6 months before making a purchase.

  • Be Realistic about Your Finances

    Sellers of franchises almost always underestimate the amount you will need to cover your costs. While they may tell you that you need only come up with the franchise fee and the cost of equipment, the reality is that you will need money to tide you over until the business begins to turn a profit. You will have to be able to survive during break-even months, or even months of lost earnings, if you are to keep the franchise afloat. The Franchise Disclosure Document (FDD) which the franchisor must provide you with, will tell you that you need a back-up of 3 months worth of expenses. It also tells you that the franchise may take up to a year to become profitable. Most experts agree, however, that to be safe you should have capital to cover business expenses for at least 6 months and personal living expenses for a year. 

  • Be Suspicious

    You should be aware that most franchise consultants are salespeople working on a high commission. Always ask how much they will earn if you make the purchase. Don't believe the lie that widely circulates saying that franchises only fail 5 percent of the time. In fact, franchises fail at approximately the same rate as other businesses. Do your due diligence in terms of research. Check for negatives reviews, high closure rates, and lawsuits against the franchise you're considering. In addition, talk to at least 10 franchisees and ask them all carefully thought-out specific questions.

  • Make Sure to Engage a Talented Business Attorney Experienced with  Franchise Law

There is too much at stake not to hire an expert in the field who will be on your side before, during, and after the transaction. Your attorney will be able to clarify the meaning of the legalese jargon in the Financial Disclosure Document, provide you with the know-how to understand a cost/balance sheet, and assist you in making the correct decision about whether you're in a good financial position to purchase a franchise.

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