Owning a business is the dream of many people, and buying a franchise can be a great way to make this happen. But before you buy that business, you need to make certain that you protect your interests.
Potential franchise owners should understand that there exists a major conflict between those who offer franchises (franchisors) and those who buy them (franchisees.) Franchisors make money through royalties, which are based on gross revenue, while franchisees make money from profits.
This can lead to franchisors making business decisions that help them a lot more than the franchisees. A classic example of this is Subway’s $5 footlong sandwich promotion. The Subway corporation loved this promotion because it greatly increased sales, but many Subway franchisees did not love it so much, as it cut into their profit margin.
The time to protect your interests is before you sign the franchise contract. In addition to hiring competent legal and financial counsel to review the contract, here are 5 ways you can do this:
1. Get a Long-Term Commitment
You should never assume that you will be able to continue owning the franchise just as long as you meet some performance requirements. You need to read the contract carefully. Many franchisors will stick end dates into their boilerplate contract. This could result in the contract ending in as little as 10 years, and they could afterward force you to sign a new contract with far less favorable terms.
2. Make Sure You Can Sell It
Another stipulation often found in boilerplate franchise contracts is the right of first refusal when it comes to selling the business. This gives the franchisor the right to buy the business before anyone else can. You should try hard to eliminate this stipulation if it is included, because if you should decide to sell your business in the future, this clause could greatly diminish the business’ value.
3. Make Sure You Can Close the Business
Every new business owner believes that they will succeed, but unfortunately some do not. Because of this, you need to make sure that the franchise contract has an early-out clause. Without it, if you decide to quit, you could end up owing significant royalties.
4. Get Territorial Protection
Every business has to worry about the competition. It is part of being in business. But you should not have to worry about competition from another franchisee of the same company. So, you should make certain that the contract provides some form of territorial protection. The more the better.
5. Get Support
Running a business can difficult, and running a franchised business comes with its own set of difficulties. Fortunately, you do not have to face them by yourself. Today, there are many professional associations that support franchisees, whose members are people just like you. You should contact one even before you sign on the dotted line.