Franchising Strategy

PrePurchase Detective Work

In addition to the routine investigation that should be conducted prior to any business purchase, potential franchise buyers should be able to contact other franchisees before deciding to invest. They should also obtain a uniform offering circular containing vital details about the franchise's legal, financial, and personnel history before signing a contract.

Reasonable Expectations

Before signing, franchisees should make sure they will have the right to:

use the franchise name and trademark,
receive training and management assistance from the franchiser,
use the franchise's expertise in marketing, advertising, facility design, layouts, displays, and fixtures, and
do business in an area protected from other competing franchisees.

In some cases, the franchisee may negotiate to have the franchiser help obtain building permits, purchase or lease equipment, signs and supplies, and construct or remodel the business premises.

Possible Pitfalls

The contract between the two parties usually benefits the franchiser far more than the franchisee. The franchisee is generally subject to meeting sales quotas and is required to purchase equipment, supplies, and inventory exclusively from the franchiser. The franchiser often has the right to terminate the franchise if it fails to operate the business according to the agreement, becomes delinquent on royalties, or violates other contract specifications.

Professional Help

The tax rules surrounding franchises are often complex, and an attorney, preferably a specialist in franchise law, should assist the prospective franchisee to evaluate the franchise package and tax considerations. An accountant may be needed to determine the full costs of purchasing and operating the business as well as assess the potential profit to the franchisee.
 
Source: U.S. Small Business Administration