Starting a franchise can be both exciting and overwhelming. In the evaluation stage, you will receive a lot of information, interviewed by the franchisor (the company that sells the franchise to you) and presented with a very large packet of legal documents.
This article covers the five questions to ask during your initial discussions with the franchisor.
The answers to these questions will give you a better understanding of the expectations and legal commitments before you have an attorney review the franchise agreement. If you are willing to accept the franchisor’s answers you can schedule a free initial consultation to discuss the next steps to review the franchise agreement.
1. Is a Personal Guarantee required?
When starting a franchise you will also be starting your own separate business. This separate business will be set up to insulate your liability (with an LLC or Corporation) to the assets of the business, thus protecting your personal assets. Nevertheless, some franchise agreements will require the owner to personally guarantee the agreement, making you and any other owners personally liable for any debts owed to the franchisor.
2. What are the marketing costs?
Marketing is always part of a business’ budget. With a franchise, you will likely be required to direct a percentage of your revenue to national marketing campaigns. In some cases, there are mandatory local minimum marketing budgets on top of the national budget.
3. What are the maximum fees?
In addition to initial startup costs and marketing expenses, there may be continuing expenses paid to the franchisor. These expenses could be fixed for a term or based on a percentage of your revenue.
4. What is the termination rate?
All franchise disclosures require a review of the termination rate of franchises and lawsuits that have been filed. It is important to understand if there have been significant problems that are likely to occur at your specific locations. For example, if you are contemplating opening a franchised restaurant in Cincinnati but find out that there have been five locations for that same franchise open in Ohio and all have closed over the past two years, it may be a sign the market does not accept the franchise’s brand. It is best to learn, at an early stage, if the market has already been tested for your specific franchise.
5. What is the initial time commitment?
If your plan is to start the location, delegate the running of the business to managers and collect checks in six months, the franchisor may have another plan in mind. In some cases, there are a mandated minimum numbers of hours in which the owners must work for the first year (or more). If you are planning on having a child, going on a long vacation or anything else that will take you away for a week or more, you may want to adjust your timeline based on the franchisor’s required time commitment.
If you are happy with the franchisor’s answers, the next step is a full review of the Franchise Agreement by an attorney.
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