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Franchise or No?

April 24th, 2013

Itching to start your own business? Three avenues await you – start from scratch; buy an existing business; or purchase a franchise.

In a prior life for eight years I was general counsel for a franchising company that had over 600 operating stores, so I’ve got some experience.

If you are considering the franchise route, the first rule is check the franchise and the franchisor out very carefully. Early in the process, you must receive a UFOC [that’s the shorthand for Uniform Franchise Offering Circular]. Understand every bit – and get straight answers to items you nay not fully understand. [Be cautious – you likely are talking with a salesman, and he may be working on a commission!] You need to do your diligence before making this substantial investment! Include discussions with other nearby existing and former franchisees.

Here, briefly are some of the pros and cons of a franchise

Pros

· Uniformity – capitalize on a standard business format with brand recognition – if the trademarks are strong [MacDonald’s vs Bob’s Burgers].

· Training and ongoing support – critical, so be sure it will be there.

· Lower risk – A plus, if true. The UFOC will list those in the system and those who have left. Call several of each.

· Marketing prowess – are there running TV ads in your area? All has to do with brand building and awareness.

· Possible financing – it’s not unusual for the franchisor to provide access to financing which today would otherwise be impossible.

Cons

· Loss of independence – You will be expected to “toe the line.” Whatever the franchisor prescribes for the system you will be obligated to follow. If you have a strong entrepreneurial spirit you may start to bristle with these mandates, feeling more like a manager and less like a boss.

· Financial risks – Yes they do exist. Not only is the start-up cost substantial for the franchise fee itself and conforming your space to the franchisor’s requirements, there will be ongoing royalty and perhaps advertising fees [possibly with minimums!]. There is also the risk that the franchisor will go belly-up! Its financial strength is important to you, so check out that information in the UFOC!!

· No way out – Typically you’re committing to the system for 10 years, locking you in to the franchisor’s concept of the ideal. And whatever “goodwill” your unit adds to the system is not owned by you, it’s owned by the franchisor.

· Potential for “black paint spatter” – Not all publicity is good! Another unit in the system is widely reported to be unclean or something else extremely negative. Such is likely to affect your operation.

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Disclaimer.

Biz Law News™ postings are provided for informational purposes only – they are not presented specific to any individual’s personal circumstances; they are not legal or tax advice and should not be construed as such.. They cannot in any way create an attorney-client relationship. Opinions and biases expressed or inferred are the author’s only. Believed-reliable third party materials are frequently used. Each reader, as appropriate, should seek independent advice from a tax or legal professional.

2013 © Gordon A Carpenter