So, You Want To Buy a Franchise?
My husband and I constantly talk about all the great restaurants we would love to have in Springfield and how we should buy a franchise and bring one here. Of course, we know nothing about running a restaurant, and the costs of the franchises we have looked into are huge, so we keep our day jobs. If you are also considering buying a franchise, there are many things you should consider carefully.
First, there are many questions you should ask yourself regarding why you want to own your own business. Those aren't legal questions, so I won't discuss them here. Nevertheless, they are important issues that I urge you to discuss with someone such as the good people at the Small Business Development Council.
Once you've answered the personal questions, you need analyze whether or not a franchise offers benefits that justify its cost versus opening your own independent business. A franchise can offer many benefits, including (1) brand awareness, (2) reputation for quality, (3) research and development, (4) economies of scale, and (5) marketing and advertising.
You next need to determine the potential benefits of the specific franchise you are considering. The franchisor is required by law to provide you with a Uniform Franchise Offering Circular at least fourteen days before you sign a contract or pay money to the franchisor. The Offering Circular must contain the following twenty-three items: (1) Franchisor/Predecessor/Affiliate, (2) Business Experience, (3) Litigation, (4) Bankruptcy, (5) Initial Franchise Fee, (6) Other Fees, (7) Initial Investment, (8) Restricted Product/Services Sources, (9) Franchisee's Obligations, (10) Financing, (11) Franchisor's Obligations, (12) Territory, (13) Trademarks, (14) Patents/Copyright, (15) Management Requirements, (16) What Franchise May Sell, (17) Renewal/ Termination/Disputes, (18) Public Figures, (19) Earnings Claims, (20) List of Outlets, (21) Financial Statements, (22) Contracts and (23) Receipt.
All of the items on the Offering Circular are important, but some may provide particular insight. You should review Item 3 regarding litigation. Is the franchisor being sued by some of its franchisees? If so, you should contact these franchisees to discuss the problems they have had. You should talk to current franchisees to learn about their experiences, problems, etc. You should also speak to former franchisees to find out why they are no longer in the business. Names and contact information for existing and former franchisees can be found in Item 20 of the Offering Circular.
Item 20 will also indicate the total number of franchises and whether the number is increasing or decreasing. If the number is decreasing, this is probably a sign of a problem. If the number is increasing rapidly, this could also be a significant problem. You could have trouble locating an acceptable location for your business, and you may face increased competition in your area. Rapid expansion can also lead to financial trouble for the franchisor if it is not properly managed. If you are still interested, you need to determine your total up front cost and your on going costs. In addition to the franchise fee, initial costs can include property acquisition, construction costs, equipment, advertising, training, inventory, insurance, permits, a liquor license, signs, computers, etc. On going franchise costs will include royalties, license fees, training, advertising, and more.
The franchise agreement may also require you to remodel when instructed to do so by the franchisor. This could be based on the age of your facility or s new image adopted by the franchisor. You need to know how often you can be forced to remodel and if there is a maximum amount you can be forced to spend.
In selecting you location, you need to consider parking, visibility, population, vehicle and pedestrian traffic, and competition. Will people be able to find you? Will people who are not looking for you see you and be inclined to visit? Regarding your territory, can the franchisor unilaterally reduce your territory? If another franchise is offered in the area, will you have the first right to purchase it?
What happens when you want out? Can you sell the franchise? Under what circumstances can the franchisor terminate your franchise? If your franchise is terminated, are you entitled to reimbursement for any of your costs?
You must develop a comprehensive business plan that includes contingency funds. As with most things in life, your costs will probably exceed your estimates and your grand opening will probably be late. You must have sufficient funds to survive while you are waiting for the business to open and start making money. You should work closely with your CPA or other advisors in developing your business plan.
You should consult your attorney and your accountant before signing ant franchise agreement. As with all contracts, you should not rely on any oral representations made by the franchisor or any of its salespeople. The contract itself will govern all of your rights and obligations.
For more information, see the Illinois Attorney General's website at www.illinoisattorneygeneral.gov, where you can read publications including Before You Buy a Franchise Understand Your Risks.
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