United States: Franchise Opportunities: One Size Does Not Fit All

Last Updated: September 29 2016
Article by Kim L. Bayless

Purchasing a franchise opportunity has become a popular means of pursuing a new business venture. The idea of joining an established group and utilizing a recognized brand can offer an added level of comfort when going into business. However, this golden slipper does not fit everyone and needs to be carefully considered. To assist in sorting through various aspects of franchise opportunities, the Federal Trade Commission (FTC) publishes "A Consumer Guide to Buying a Franchise" and offers other assistance found on its website or by calling toll free 1-877-FTC-HELP.

This information can be very helpful and is made available free of charge to protect those willing to seek and use it.

Consider Doing It Yourself

In working with clients viewing these opportunities, I try to provide certain practical advice. The first question I generally pose is - why not do it yourself? That is, why use limited resources to acquire and operate a franchise if you can do basically the same thing under your own mark or design. The hope is that the synergistic effect of joining a franchise group will enhance the likelihood of its success. In considering a franchise opportunity, I suggest you make a list of the benefits desired in being part of the franchise system. Doing so should cause you to consider whether it will help fill the gaps in your business skill set and is worth the cost of franchise, royalty and other fees. If the list is short, you may want to consider going it on your own. On the other hand, if your list is long, your weaknesses should be supported by the strengths of the system. This mental process is helpful not only in considering the basic question but also in determining if what you believe you are obtaining from the franchise system will actually be delivered through the franchise agreement and your relationship with the franchisor and the other franchisees.

Review the FDD

As a result of an FTC rule and certain state agency regulations, franchisors are required to disclose basic information, typically set out in a Franchise Disclosure Document (FDD). The FDD should be delivered to you in advance of making any formal commitments and includes an abundance of useful information concerning the franchisor and the franchise opportunity conveyed in plain english. While this document is often long and detailed, it contains many important facts and is provided to give the prospective franchisee a basis for making an informed decision.

I am often asked to review the FDD for red flags that might significantly affect the decision to join a franchise system. There are many that should raise potential concerns regarding the franchise opportunity. Here are a few for your consideration:

  • New system – no history of developing the brand
  • Undeveloped Operating Aspects – purchases, software, or advertising to be considered in the future
  • Few franchised units – limited experience in operating multiple units
  • Use of affiliates - capturing various levels of profits may create conflicting interests
  • Limited products or services – less room for economic error
  • Weak financial statements – limited ability to weather tough times
  • Limited management experience – no history of capable assistance
  • Limited rights to expand – may not provide the desired economic dynamics for your investment
  • Litigation or bankruptcy history – uncertain past

Understand the Franchise Relationships

Without a doubt, one of the most important aspects of a franchise is the relationship it establishes among the franchisor, the franchisee and the other franchisees. It is hoped the benefits of the relationship will help the system (and each franchisee) grow and prosper. I suggest you take every opportunity to meet and talk with management of the franchisor and the other franchisees. Your gut reaction to them will be a good barometer of whether the relationship advantage will be realized through your participation in the program. The FDD provides names and contact information of franchisees, both current and those that have recently left the system. Contact current franchisees to determine their view of the system. If possible, also try to speak with franchisees that have exited the system; it can be even more informative to see what problems they encountered and why their experience did not result in continuing participation.

Modify the Franchise Agreement

The FDD will also contain a copy of the franchisor's form Franchise Agreement. This document will contain the terms of the legal relationship that will exist if you decide to become a franchisee. It is important that the franchise document be reviewed by legal counsel and you have a good understanding of the requirements of that document.

A fundamental question that often arises at this point in the process is whether to request changes to the Franchise Agreement. While each franchisee would like to tailor the Franchise Agreement to its individual needs, a well advised franchisor will not want to make any changes. One of the main strengths of a good franchise system is the consistent and uniform approach to its operation, and a franchisor will work hard to maintain this benefit. In reality, a franchisor is not going to grant many concessions, and spending the time and resources to assert a comprehensive list of requested changes will probably be a futile effort. It is more productive to compile a short "wish list" of items particularly important to you and see if they can be agreed upon. In most events, a franchisor will only consider changes in areas that do not have system-wide impact. Here are some topics to consider:

  • Additional Support – help fill skill gaps
  • Modification of protected territory size – fit the size to the desired area
  • Opportunity to open additional units – take advantage of economies of scale
  • Extend periods (e.g., opening, training) – tailor to needed time table
  • Installment payments of franchise fees – provide cash flow relief
  • Limits on personal guaranties – restrict individual legal exposure
  • Maintain royalty percentage on transfer – obtain benefits for full term of agreement
  • Terminate covenant not to compete or limit damages on franchisor default – franchisor should not benefit from its breach
  • Right to terminate with notice/payment – help limit exposure in new system

Franchisors will sometimes agree to amendments or to current consents/waivers of requested actions. To justify these potential changes, a prospective franchisee may be able to, for example, assert the small size or newness of the system, or highlight what the franchisee is bringing to the table and offering the system, such as the willingness to participate in a new system or develop multiple units.

These are just a few of the topics to be considered by a prospective franchisee. When determining if a franchise is the right fit for you, be realistic about your expectations, and understand the true costs and benefits of the franchise approach. The wealth of information available should be considered and of significant assistance if you will take the time to utilize it in the process.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
Smith Gambrell & Russell LLP
LeClairRyan
Strasburger & Price, L.L.P.
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Smith Gambrell & Russell LLP
LeClairRyan
Strasburger & Price, L.L.P.
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions