Consider These 5 Factors Before Investing In A Franchise

October 14, 2021

If you’ve always desired to have your own business but find the prospect of starting one from scratch intimidating, you may want to explore investing in a franchise. When you buy a franchise, you purchase an established company concept and brand, which greatly simplifies the starting process. Apart from having a recognizable brand, the majority of franchisees provide ready-made operating systems, comprehensive training programs, and continuous assistance from the franchisor.

While franchises offer a number of benefits, they also come with their own set of distinct disadvantages, such as the need to adhere to certain operating standards and pay continuing royalty payments, making them unsuitable for everyone. To decide if investing in a franchise is the correct decision for you, do extensive research on the franchise prior to signing on the dotted line. Before investing in a franchise, consider the following five factors to verify that the arrangement is worth the investment and that the franchise systems are a good match for your particular requirements and temperament.

photo of a girl wearing glasses with a restaurant in the background

1. Determine the franchise’s real cost

In contrast to establishing your own company, when all of your investment directly supports your operations, a significant part of your initial investment in a franchise goes to the franchisor for licensing rights, training, and equipment. To discover the actual cost of a franchise, carefully read the Franchise Disclosure Document (FDD), which franchisors must give you before signing a franchise agreement.

In addition to the initial investment and ongoing royalty payments, franchise agreements often include fees for training, advertising, and special promotions. However, since FDDs may be hundreds of pages long and include complex legalese, you should always have an experienced business lawyer help you with your review. Carefully reviewing the agreement is part of how to verify that the franchise is solid, worth the investment, and that you understand all of the conditions that may be buried in the FDD’s fine print. Review the Federal Trade Commission’s (FTC) Consumer’s Guide to Buying a Franchise to give you some idea of the complexities of running a franchise and help you better understand the FDD.

2. Determine the systems and training provided

One of the main benefits of buying a franchise is that you are investing in a proven business concept. But not all franchises are made equal; so be certain that the franchise you buy into has solid operational procedures for everything required to operate the company on a daily basis, from inventory and equipment to marketing and payroll.

Additionally, the franchise should provide sufficient training and continuous assistance to guarantee you can learn these technologies with minimum hassle. Most franchisors, for example, provide both classroom and on-the-job training, which is usually either at the franchise headquarters or a separate training facility. Training may take anywhere from a few days to many months, with the typical franchisee training program lasting two to four weeks. Having the right processes and training may significantly improve the odds of your franchise’s success; so be sure the business you buy provides strong assistance in these areas.

3. Determine the franchisor’s level of restrictions

The degree of control and limitations imposed by the franchisor is one of the main disadvantages of franchisees. Most franchisors require franchisees to adhere to rigorous rules and standards for pricing, product offerings, operating hours, and shop design. In most instances, you will not be permitted to deviate from these guidelines and run things your own way, such as experimenting with new marketing tactics or changing your product offers. Although you own the franchise, the franchisor usually retains considerable control and expects you to do things their way.

With this in mind, you’ll need to decide if you’re comfortable operating a company in such a constrained environment.

4. Examine your location’s market potential and competitors

Consider the local market and consumer demographics before selecting a franchise. Determine what the local clientele and market are willing to support now and in the future. Research any prospective rivals who are currently conducting business in the area. You may discover that other franchisees are already operating in your area. Some franchisors do provide exclusive territory, while others do not. And don’t simply think about your local competitors. You must also decide if the franchisor is permitted to sell goods directly to local retailers or via other distribution methods, thus establishing itself as a possible rival.

Some of the most respected franchisors can aid you in doing market research and selecting the ideal locations for your company, while others will even assist you in negotiating leases. While owning a franchise may provide you with some built-in product recognition and client loyalty during the beginning period, it is essential that you do market research to guarantee demand for your product or service will survive and expand in the future.

5. Think about forming an LLC or a corporation

Owning a franchise, like owning any other company, exposes you to possible responsibility. Without the appropriate organization in place, there is no distinction between your company and personal assets; therefore, your personal assets would be at risk if your franchise went into severe debt or was sued. Given this risk, consider forming your franchise as a limited liability company (LLC) or a corporation to protect your personal assets from business obligations. When set up and managed correctly, these entities create your business as a separate legal entity distinct from you as an individual, protecting you from being held personally responsible for the franchise’s debts or legal problems.

Furthermore, if you want to sell your franchise in the future (if allowed by your franchise agreement), prepare ahead of time by establishing your company organization to qualify you for up to $10 million in capital gains tax exemption upon the sale. Before starting any company, work with an experienced business lawyer and an accountant to help you start your business correctly from the outset to optimize future tax savings using methods like these. With them, you will get guidance in determining, establishing, and maintaining the corporate structure that is most suited to your business.

Get Your Professional Assistance Before Making A Deal

Investing in a well-known franchise may seem to be a sure-fire way to fulfill your entrepreneurial ambitions. However, no business is without risks and drawbacks. Keeping this in mind, don’t allow your aspirations and dreams to prevent you from doing enough study and preparation.

Don’t make the mistake of investing without first getting help to examine the franchise agreement to ensure you receive the best deal possible and know any hidden fees or limitations. Furthermore, you will want a lawyer to make clear for you what the FDD says about the franchisor’s contract termination, contract renewal, and conflict resolution provisions to ensure that you do not face any major problems down the line.

Finally, working with an experienced business lawyer, you can get the assistance you will need to establish and maintain the appropriate business structure to protect your personal assets if your franchise is sued or goes bankrupt.

This article is a service of Greg Gordillo, Family Business Lawyer™. We offer a complete spectrum of legal services for businesses and can help you make the wisest choices on how to deal with your business throughout life and in the event of your death. We also offer a LIFT Start-Up Session™ or a LIFT Audit for an ongoing business, which includes a review of all the legal, financial, and tax systems you need for your business. Schedule your LIFT Session today!


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