Key Considerations When Buying a Franchise

Many entrepreneurs looking for a turnkey business opportunity seek to purchase a franchise. Owners of franchise outlets do not need to develop a brand or create a unique business plan to achieve financial success. In many cases, potential customers are already familiar with what they offer, and their brand confers instant credibility on their operation. However, not every franchise opportunity is a good investment. Before signing a franchise agreement, prospective franchisees should carefully evaluate the total cost of ownership, the scope of territorial protections and the obligations each side assumes under the agreement.

Franchise costs vary widely and can be quite confusing, but buyers generally need to make a significant upfront investment. They usually also must demonstrate that they possess a sufficient amount of residual capital. Monthly payments to the franchisor are typically based on gross sales, not net profits. Calculating the likely total expenses of operating a franchise can be difficult for those with no experience running this type of operation. 

Territory protections are another critical element of any franchise agreement. Generating enough sales to produce a profit often requires limiting direct competition from nearby franchise locations. The scope of territorial protections can have a major impact on the long-term profitability of a franchise. The more franchise locations there are within driving distance, the more competition there may be for the same consumer base. In some cases, franchisees find themselves bound by agreements that outlast their territorial protections, allowing additional franchise locations to open nearby and potentially reducing market share and sales.

Franchisor investment is also an important aspect of any franchise agreement. The value of a franchise is deeply tied to both the brand’s overall power and the level of support the franchisor provides after the purchase for the following:

• Training for owners, managers or crew members
• Nationwide marketing to drive brand awareness
• Local marketing efforts to support consumer interest
• Use of the company’s intellectual property
• Immediate access to vendor and supply chain infrastructure

There are also several other important terms to evaluate, including restrictive covenants, early termination provisions and performance requirements.

Prospective franchisees should also carefully review the Franchise Disclosure Document (FDD). The FDD contains important information about fees, litigation history, financial performance representations and the obligations of both the franchisor and franchisee. Reviewing this document thoroughly can help prospective owners identify potential risks before making a long-term commitment.

Working with a small business attorney who has experience in franchise law can help you assess your options. Should you decide to go forward, it is critical to have knowledgeable counsel during the contract review process.  

The Law Offices of Donald W. Hudspeth, P.C. can assist with due diligence, contract review and business transactions for aspiring franchisees in Phoenix and throughout Arizona. Those considering a franchise purchase can schedule a consultation by calling 866-696-2033 or contacting us online.