Purchasing a franchise can be a great step for many entrepreneurs. It allows the franchisee to build on an established brand while taking advantage of prior market research, vendor negotiations and large-scale advertising. As long as you follow the rules and pay attention to boundaries, franchise ownership can be very lucrative.
While purchasing a franchise can be exciting, it is important not to ensure you are protected by the franchise agreement before you sign on the dotted line.
What is contained in a franchise agreement?
Franchise agreements are legal documents between the franchisor and the franchisee. They detail the contractual rights and obligations of both parties if a contract is finalized.
Franchisees receive a Franchise Disclosure Document (FDD) before they sign the franchise contract. It should be provided to the prospective franchisee no less than 14 days before a contract is finalized. This document contains all the details that you need to know to make an informed decision before purchasing the franchise.
Per the FTC’s Franchise Rule, the FDD must include the following information:
- Obligations of the franchisee
- Territory rights
- Franchisor support
- Startup fees and initial investment estimate
- Any product or service restrictions
- Steps in handling disputes
- Financial statements from the franchisor
- Any trademarks or intellectual property guidelines
Things to know before purchasing a franchise
Purchasing a franchise can be an expensive and lengthy process. In order to improve your chances of success, there are several things you should know before signing your franchise document:
- Know your franchisor. It is important to do a deep dive into the franchisor, not only into their financial records but also into their track records with other franchisors. Are there any pending lawsuits? Have other franchisees been successful? Is this a product or service that is increasing or on the decline?
- Know your true costs. Your initial investment is not your only expense when purchasing a franchise. Though it most likely includes your use of business systems, licensing, and trademarks owned by the franchisor, it may not include real estate, equipment, marketing or vehicles. Be sure to account for ongoing costs such as royalty fees, advertising and other franchise-related costs.
- Know what training and support is available. Most new franchise owners will need extensive training provided by the franchisor. Learning point-of-sale equipment, inventory management, trademark and licensing requirements and human resource functions are all important factors that can determine the success of your venture. What type of ongoing support does the franchisor provide?
- Be realistic about your commitment. Are you ready to invest the time and money necessary to successfully own and operate a franchise? Will the time and expense bring you a satisfactory return on your investment?