Category: Franchising

Franchising can be a wonderful, fulfilling experience – but it can also be a depressing, disenchanting experience. Unfortunately, there are a number of franchisees that, much to their discouragement, are faced with the harsh realities of franchising. Why? Take a look at the following mistakes many entrepreneurs attempting to become franchisees make.

1) They’re just not suited for franchising

Sometimes the simplest explanation is the correct one. Before you invest in a franchise, take the time for some good old self-evaluation: are you ready to be a team player in a larger organization and adhere to that organization’s guidelines and structure? If this concept makes you uncomfortable, you might want to stick to being an independent business-owner.

The law tends to favor the franchisor over the franchisee when it comes to breaking a franchise contract, primarily because franchisors are able to limit their liability via UFOCs and franchise agreements with built-in clauses and disclosures. It’s no wonder that franchisees have little wiggle room when opting out of an agreement: franchisors are required to list and substantiate earnings claims, current and past litigation, the number of franchises in operation and the number terminated, and all other related material in the UFOC/FDD document. Occasionally franchisors will provide a buyout clause to franchisees, but most franchisors want to preserve franchise agreements to save money and time. Hence, franchisors generally make every attempt to reconcile problems via arbitration or mediation.

Franchisors often don’t give straight answers to franchisees asking the question “How Much Can You Make in Franchising?” due to the numerous legalities involved. To go into detail: the Federal Trade Commission (FTC) has strict requirements regarding earnings claims statements for franchisees. In a franchisor’s Uniform Franchise Offering Circular/FDD, earnings claims statements must be accurate and substantiated in written form. Franchisors can get into a lot of legal trouble if they misrepresent themselves in their UFOCs/FDDs.

Have you always wanted to own and operate your own business? Given that there’s a high failure rate for independent, non-franchise businesses, you might want to consider buying a franchise instead. After all, franchising provides a proven system coupled with the support of a larger organization – invaluable pluses for first-time and therefore inexperienced business owners. A few key advantages singular to buying a franchise include instant brand awareness and credibility, administrative and/or technical support, quicker return on investment, strong management, franchisor-provided training, and a franchisee network devoted to supporting fellow franchisees.

Would you like to sell your franchise? Easy enough in theory, but not necessarily so easy in practice – the terms and conditions for selling your franchise are outlined in the Franchise Agreement, and Franchise Agreements are as a rule drafted with the interests of the franchisor in mind. Hence, you may very well find buy-back and right of first refusal clauses in the Franchise Agreement, which limit your rights regarding selling your franchise business.

Buy-back and first refusal clauses give the franchisor the right to (1) buy back your existing business from you before you can accept offers from other buyers and (2) first refuse to buy back your business before you entertain outside offers. The purpose of these clauses is to give franchisors control over who enters their franchise system: they have the ability to buy your business at a low cost so they can then sell to another franchisee for a substantial profit.

It is of course up to the franchisor to decide whether one not its franchisees can negotiate the terms of a franchise agreement. Unsurprisingly, the majority of large, established franchisors will not allow franchisees to make changes to the franchise contract, since they tend to have a history of successful, content franchisees and are aware that, given the size and success of their concept, there are always potential franchisees willing to buy into their system as is.

Are you considering buying a franchise? One of the first steps you ought to take is to determine whether that franchise is doing well or poorly financially, which involves determining what the franchise’s actual quarterly and/or annual earnings are.

The FTC gives franchises an opportunity to disclose franchisee earnings information via the Item 19 section of the UFOC (Uniform Franchise Offering Circular) document (soon to be termed “FDD: Franchise Disclosure Document”). Franchises are free to reveal anything it would like about income, sales and cash flow.

If you’re thinking that purchasing a franchise concept that appeals to as many people as possible equals success, think again: targeting a narrower customer base may be a better way to go.

As a new franchisee, you want to distinguish yourself – I mean, let’s face it: you’ll have lots of competition to deal with, and you want to secure all the advantages you can. There are two primary advantages to selling a specific product to a particular subsection of the public:

Franchisors typically provide lots of aid to their franchisees, including the following:

Training/Operations manual:

Franchisors provide their franchisees with a detailed operations manual that contains instructions for carrying out their operating system. The operations manual lists the rules, standards and specifications of the franchise as well as the specific responsibilities and tasks of the franchisor. Information such as performance/management standards, processes and protocol and employee roles is also contained in the manual. In addition to an operations manual, franchisors provide operating system and business training for franchisees. Training can take place at any location designated by the franchisor, including corporate headquarters.