Buying a Franchise - News You Can Use
Great story by John Tozzi, at BusinessWeek, about buying a franchise and due diligence.
"Think buying a franchise means you get the benefits of owning a business without the risk of business failure?Think again.
Without proper due diligence, franchisees can find themselves stuck in bad business models, chained to unfavorable contracts, or victims of fraud."
John quotes Bob Purvin, about the risk of franchising and collaborative problem solving:
"Where should you start if you're new to franchising? Aspiring franchisees need to think more like investors than entrepreneurs to thoroughly vet any opportunity before buying, franchise experts say."The franchising industry represents that franchising is a safe and secure path to business ownership," says Robert Purvin Jr., head of trade group American Association of Franchisees & Dealers and the author of Franchise Fraud: How to Protect Yourself Before and After You Invest. "
But in today's marketplace, franchising is almost never business ownership, and it is very often not a safe and secure path."
He explains that buying a franchise means buying a license to operate someone else's business for the period of the contract.
Purvin says prospective franchisees should first check whether a system has an independent franchisee association (BusinessWeek.com, 1/29/07) that the company recognizes.
These organizations let franchisees share information, negotiating power, and legal resources. If a franchisor doesn't recognize an independent association, Purvin says buyers should keep looking.
"I would limit my search to companies that have an established collaborative culture so that I know if problems come up there's going to be a process in which we can air those problems and resolve them," he says."
The last point is very important.
Fortunately, for the prospective franchisees, the FTC has mandated that the franchisor disclose in its FDD (franchise disclosure document) the existence of its independent franchisee association.
Whether prospective franchisees will contact the IndFA is another problem.
John also interviews Ontario's own Les Stewart.
"You should hire a lawyer who specializes in franchising to help you steer clear of a bad investment or a harmful contract, according to Les Stewart, a franchise consultant and industry watchdog who once lost his personal savings on a failed lawn-care franchise.Aspiring franchisees should expect to take six months to vet the opportunity and to spend 5% to 10% of their investment on legal fees, Stewart says. "If you're not, then you're unnecessarily gambling," he says.
Lawyers should review the franchise offering, contract, and loan documents. For married franchisees, Stewart says both spouses need independent counsel, because both can be on the hook for debt if a venture fails."
The one caveat I would add is that the review of the franchise disclosure document and franchise agreement should reflect an overall assessment of the fairness of the contract, exit options and the ability to control your own destiny.
