Posted by Panayioti Logothetis.
Who wouldn’t want to own a successful franchise such as McDonald’s, Dunkin Donuts or 7-11? The market has examined the best recipes for a quarter pounder, a Boston cream donut, and the right combination of candy bars and chips to have next to the register. The buyer of the franchise believes they are buying a franchise that has a proven successful model on all levels from the labeling to the valuing to the proper promotion strategies. The work has been done! Unfortunately, a lot can go truly wrong for a prospective entrepreneur!
According to three professionals with widespread knowledge of the franchising world, Ed Teixeira, a former franchisor and franchisee, Josh Brown, a lawyer from Indiana who specializes in franchising, and Sean Kelly, a former executive of the franchise, Auntie Anne’s, all suggest 12 interesting things to consider before buying into a franchise that maybe one wouldn’t have thought of. Of the 12 recommendations, “giving yourself a personality test,” “assess your strengths,” “beware of financial consultants,” “don’t believe the franchise lie,” “dig for dirt,” “talk to franchisees,” and “explore working in a store,” all appear to be tackled easily enough by the would-be entrepreneur on their own. The remaining five recommendations, however, definitely would require business law knowledge that the franchisee should consider retaining a professional for. As examples, “study the field,” “count your money,” “read the entire financial disclosure document (FDD),” “consider hiring professional help,” and “do cost/benefit analysis,” should be thoroughly explained before that signature binds one to an agreement that could prove detrimental.
Buying into a franchise should be a positive experience for all involved, including the franchisor and the franchisee. Whether one uses their life savings or successfully borrows the money to make their dream come true, one must always proceed with caution. Franchisees often believe first hand that if the franchise has been around forever, their location is bound to be successful as well. However, seeking franchise legal advice is imperative when taking on this endeavor. J. Michael Dady, founding partner of Dady & Gardner, a firm specializing in franchise law says, “[f]ranchisors care about top-line revenues; franchisees care about bottom-line cash flows.” Thus, “[t]here’s an inherent conflict between franchisors and franchisees,” (5 Ways Franchisees Can Protect Their Business Interests by Lissa Harris, Entrepreneur). Many may not realize the franchisor’s royalties are based on the franchise’s gross revenue, not profit. As a result, a franchisor doesn’t just sell one of their franchises and leave the franchisee free reign to do what they want in their newly located store. The franchisor, rightfully, continues to control the business and can impose promotions, for example, at the expense of the individual franchisees’ cash flow – even though the franchisor believes it will benefit both sides. Although you may love that deliciously seasoned quarter pounder at McDonald’s, that deliciously frosted Boston cream donut at Dunkin Donuts, or the easily accessible combination of sweet and salty by the register at your local 7-11, make sure you weigh out the pros and cons prior to signing your name on a legal franchise contract agreement!
Panayioti is a mathematical finance and information technology management major with a minor in pre-medical studies, at the Stillman School of Business, Seton Hall University, Class of 2021.
Article: “12 Things To Do Before You Buy A Franchise” By: Susan Adams