What’s Involved?
What Issues Do Franchise Businesses Face?
Franchising involves two parties, known as the franchisor and the franchisee. If you’re interested in franchising your business, you’re a franchisor. The entrepreneurs interested in buying into a franchise are the franchisees.
In the franchise model, the franchisor allows a franchisee to open a business using their brand, products, and services. The franchisee builds, owns, and operates the business, but is allowed to use the logo, name, products, services, and other assets of the franchisor.
In exchange for the rights to use these assets, the franchisee must pay the franchisor a number of fees, which can include startup fees as well as royalties. These royalties are taken as a percentage of the franchisee’s overall revenue.
We have worked with clients buying into exciting new franchise opportunities, as well as exiting from bad franchising deals. If we have learned anything through this experience, it is how important the Franchise Disclosure Document (FDD) is to every franchise deal. This is the document that franchises live and die by and your understanding of the document could be the difference between success and failure.
In the FDD, franchisees learn about the franchise’s financial health, how much an average franchisee makes, if the franchise is subject to litigation, how much it will cost to get their franchise up and running, and the franchisee turnover rate.
Before entering into a franchise agreement, we strongly recommend diving into the FDD and reviewing the terms of the agreement, building out a pro-forma to project possible revenues, asking the franchisor good questions, visiting other franchise locations, and consulting with an experienced attorney.