Tips To Help in Negotiations When Purchasing a Franchise
by Robert MayerA new franchise opens every eight minutes of each business day. Here are six things to consider.
Tip 1. Evaluate the Three C's
Where do you begin when there are thousands of franchised businesses spanning 65 different industries? Begin with the three C's: the Company, the Customer, and the Competition.
The Company
Basic misconception: Running a franchise means finally owning your own business and being your own boss.
Basic reality: You're just leasing a trademark. The real boss is the company selling you the right to use their trademark. Everything you do will be dictated from the second you turn the key in the door each morning.
What are the company's objectives, vision, and values?
Does the company have the talent, capital, and facilities to develop?
What are the company's strengths and shortcomings?
The Customer
What is the market for the company's products and services now and tomorrow?
Is the customer base definable by gender? Ethnicity? Age? Geography? Education?
The Competition
Is the company's major competitor gaining or losing market share?
What are the competition's strengths and shortcomings?
How will the company be able to maintain or increase its market share?
Tip 2. Disclosure Document Alert
Federal law mandates that, as a potential franchise purchaser, you must be provided with a Uniform Franchise Offering Circular (UFOC) in the Federal Trade Commission (FTC) format before any money is paid.
A UFOC describes the company, its franchisees, working capital requirements, pending litigation, and franchise obligations.
ALERT: A UFOC does not signify that any state or federal authority approves or recommends the franchise investment.
If you are looking at the earnings claims of prototypes (one or two company-owned stores), then consider:
How do the locations of those stores differ from your prospective unit in geography, climate, and demographics?
Did it take years to build the company store's customer base to its present size?
Is much of the company store's success attributable to the personality or special ability of its operators?
Tip 3. Talk to Present Franchisees
Ask about their negotiations with the franchisors. Would they still have invested in the franchise if they knew then what they know now? Work at a franchise store for a few weeks, even if it means being an unpaid volunteer.
Tip 4. Talk to Former Franchisees
Disclosure documents will list people who have voluntarily or involuntarily terminated their franchise. Listen to what they say about their negotiating experiences and negotiating successes with the franchisor.
Tip 5. The Franchise Agreement Is Negotiable
Franchisors don't sell franchises. Franchisors grant licenses allowing others to use their well-known name, operating system, and support system for a defined period of time. The controlling and operative document is the franchise agreement.
Negotiating tips:
Franchisors in a start-up time frame will almost always be more flexible in negotiations than a well-established operation.
Explore with the franchisor ways in which your franchise will not be identical to its other franchise units. For example, will your unit be limited in any way, such as operating hours, by its location?
Following are some of the issues you must consider-and, if possible, negotiate.
Territory
Are the territorial boundary lines clear? Can the franchisor open another unit so close to you that it will impact profits?
Franchise ownership really involves leasing a trademark and system from the franchisor. |
Can the franchisor sell its products in "your" territory through non-franchise outlets?
If the exclusivity of the franchise territory is expressed in miles does that mean as the crow flies (preferable) or road-distance miles?
Financing Assistance
A franchisor's promise to "assist" in obtaining financing may mean nothing more than help in completing loan applications.
If the franchisor is providing the financing, what will be the terms? What collateral and/or guaranties will be required?
Site Selection
Will the franchisor assist in site selection or just approve or disapprove your selections?
ALERT: Does the franchisor have its own site selection staff or does it employ local brokers? Local brokers may not have the "feel" needed to select a site that will make your unit a success.
Site Development
Are there local building ordinances impacting signage or build-out elements essential to the franchise's image and ready customer identification?
Training
Visit the franchisor's training facilities.
Who bears the expense of travel and lodging during training?
Is there a requirement for periodic retraining? If so, at whose expense?
Standards of Conduct
Operating standards are often expressed in vague terms. Be aware that a requirement for "refurbishing" (at your expense) can mean changing roof colors or picking up the tab for installing a new look mandated by the franchisor.
Advertising
Each of the following questions should be considered critical:
Can advertising obligations be changed by the franchisor?
How much must you spend on local advertising? What type of advertising? How frequently?
How much must you contribute to national advertising?
Purchase of Products
Franchisors provide product specifications and names of vendors whose products meet those specifications. The franchisor's specifications may be so restrictive that no products other than the franchisor's own, or those of a favored vendor, will be acceptable.
Managerial Assistance
If you need help, will the franchisor provide assistance? At what charge?
Who will bear the expense of travel for out-of-town help?
Renewal
Franchise agreements typically have terms of 10 to 20 years. They are often nonrenewable or renewable only at higher rates.
If renewal is not allowed, what will you be paid when the franchisor takes over your business?
Right of Relocation
If your site or territory isn't as successful as you expected, can you "move" your franchise to another site within the territory or to another territory? Will there be a relocation fee?
Death or Disability
Does the franchisor have the ability to acquire your business in the event you die or become disabled? If so, at what price?
Listen to what franchisees say about their negotiating experiences with the franchisor. |
Termination
Under what circumstances can the franchise be terminated?
Are elected franchisees part of a panel that will determine whether termination is justified?
What rights do you have to appeal or contest termination? To whom is that appeal made?
Covenant Not to Compete
What restrictions are applicable to your future once you are no longer a franchisee?
Tip 6: Hire a Lawyer
Negotiating the purchase of a franchise isn't a do-it-yourself project. Hire a competent business lawyer to review documents before signing.
Robert Mayer, author of How To Win Any Negotiation Without Raising Your Voice, Losing Your Cook Or Coming To Blows and How To Win Any Argument Without Raising Your Voice, Losing Your Cool, Or Coming To Blows, is a lawyer and mediator with Mayer & Glassman in Los Angeles. Visit his web site at www.TheWayToWin.net.
|
