Thinking About Buying a Franchise?
By GINA M. NORRIS, ESQ.
Wiggin & Nourie, P.A.
Have you always wanted to own your own business? If the answer is yes, but you are reluctant to compete with well-established businesses selling similar products or services, you might consider buying a franchise. Buying a franchise can be a great choice for entrepreneurs who are looking for a new business ownership opportunity without starting from scratch.
Although you may be required to relinquish significant control over your business as part of the franchise relationship, the purchase of a successful franchise will allow you to open up a business with immediate name recognition, goodwill, tested products and methods, group advertising power, and assistance from the franchisor.
If you think a franchise might be the right business opportunity for you, keep in mind a few key considerations before signing a franchise agreement:
Initial Investment. Remember that the initial franchise fee is only a portion of the amount you will need to get your franchise up and running. Ask the franchisor to estimate the entire amount of fees and expenses that you are likely to incur during your first year of business. Item 6 of the Franchise Disclosure Document lists a summary of the typical costs. If you plan to finance the initial fees by taking out a loan, make sure you include an amount sufficient to cover the entire initial investment.
Territory. Many potential franchisees expect to receive an exclusive territory as part of the franchise agreement. Not all franchisors, however, will grant an exclusive territory. Even if they do, their definition of territory might not be what you want or expect. Determine the exact nature of any exclusivity or protection granted, whether it is contingent upon conditions such as achieving certain performance levels, and whether the franchisor reserves the right to change your territory during the term of your agreement. If territorial exclusivity is critical to the business, make sure that your territory is specifically defined in the contract.
Location. If the business is location sensitive, determine whether you will get to choose the location or whether the franchisor will select it for you. In negotiating your lease, be sure that you have the option to remain at the same location for the entire term of your franchise agreement. If you sign a 20-year franchise agreement and only a 10-year lease, you might have to relocate in the middle of your franchise term or be forced to pay a much higher rent in order to stay. Similarly, if your lease is 20 years for a 10-year franchise agreement, you might remain liable for lease payments without a business to run if for some reason you cannot renew your franchise agreement.
Sources of Products. If the success of the business is largely contingent upon your ability to obtain a certain type or quality of product, find out whether the franchisor has made long-term arrangements for the supply of such products and whether the franchisor will negotiate prices for your benefit. Determine whether you have the right to obtain alternative types or brands of products or purchase them from other suppliers.
Termination/Renewal. Make sure you clearly understand your rights with regard to termination and renewal of the franchise contract. Under what circumstances are you permitted to terminate? Can the franchisor terminate the contract without cause? Does the franchisor have the option to purchase the franchise upon termination? How is the price determined? Under what circumstances are you permitted to renew your agreement? Often franchisors will allow you to renew, so long as you agree to sign the then-current version of the franchise agreement, which may include provisions that are substantially different from the version you initially signed, and may involve expensive remodeling or renovations.
In addition to the above considerations, it is very important to thoroughly review the entire franchise agreement and disclosure documents to ensure that you fully understand all of your rights and obligations prior to entering into a long-term franchise relationship. Franchise agreements are usually very long and complex, so you are well advised to seek the advice of an experienced franchise attorney early in the process.
I'm pleased to be able to cover the topic of franchising as part of the Ask the Expert series, and I welcome your questions.
Gina M. Norris, Esq., is an attorney with the law firm of Wiggin & Nourie, P.A., where she is a member of the firm's Business Law and Real Estate Law groups. Attorney Norris focuses her practice on business transactions, including mergers and acquisitions, franchising, commercial real estate transactions, and debt and equity financing. She represents both commercial and individual clients in the drafting, negotiation, and review of contracts, including leases, license agreements, employment agreements, supply agreements, and secured transactions. She provides counsel to start-up businesses with regard to entity choice and formation