Five Things To Do Before Buying a Franchise

Steven M. Lutz

Author: Steven M. Lutz

POST DATE: 9.18.20
Ccha  Business Services

CCHA is proud to work alongside entrepreneurs during the creation, acquisition and operation of an existing business or a new venture. We know what it takes to help businesses reach their goals, and will work with you every step of the way to help achieve your business objectives. Whether you are looking to sustain your existing business or buy an existing business or franchise, our business attorneys will work with you every step of the way without requiring you to incur the expense of in-house counsel.

If your business ownership goals include the possibility of acquiring a franchise, there are a variety of legal matters you should consider before moving forward. Acquiring a franchise can be a complicated endeavor and you should always consult qualified legal counsel prior to making any such decision; however, here are five basic items you should at least consider before buying a franchise:

CCHA five things to do before buying a franchise

Talk to other franchise owners

Who better to utilize as a resource than someone with experience in both acquiring a franchise and operating the franchise you are considering acquiring? Many franchise owners are willing to take some time to discuss the positives and negatives of franchise ownership with you and can provide you with invaluable and practical guidance regarding the day-to-day operations of a particular franchise location or type. If possible, connect to ask questions about the pros, cons, hidden costs, hurdles and surprises they experienced.

    Completely read and review the Financial Disclosure Document (FDD)

    Each franchisor is required to provide a very detailed (and many times extremely lengthy) disclosure document regarding operational and financial matters associated with franchise ownership - the Financial Disclosure Document (FDD). The FDD is usually full of valuable information such as costs associated with franchise operations, contact information of existing franchise owners, operational history of existing franchise locations, the types and costs of training opportunities offered by the franchisor, past pr pending bankruptcy filings by franchisor entities, the existence of legal claims relating to a particular franchisor and/or its officers, and details about costs and expenses you may incur with respect to franchise ownership that you may not have considered. Give strong consideration to engaging a CCHA attorney with experience in reviewing and commenting on franchise disclosure documents to review the applicable FDD and go over material terms with you so you better understand the risks (both business and financial) associated with franchise ownership.

      Explore the franchise from the inside

      Consider conducting a scheduled site visit to an existing franchise location to view the location and discuss the physical characteristics of the franchise location with the existing franchise owner. You might also consider working as an employee of an existing franchise location for a period of time prior to becoming a franchise owner yourself. This will allow you to become intimately familiar with the internal operations of both the franchise location and the franchisor and how each of these entities work together. Understanding the inner-workings of a franchise location helps prepare you for the nuts and bolts operational matters associated with owning a franchise, especially when it comes to employee and human resource matters.

        Do your research and select your location carefully.

        There are a myriad of informational materials online regarding the positives and negatives associated with acquiring and owning a franchise. Conduct your own, independent, research into the profitability and viability of the franchise type you are considering so you can evaluate the time and money you need to invest to make the business successful over the long haul. Consider engaging other professionals, such as accountants and franchise consultants to assist you in your decision making process. Part of that research must include the identification of a franchise location. The right location is many times one of the most fundamental factors to the success of any brick-and-mortar business, including a franchise. Use the franchisor as a resource for insight and data on locations you may be considering. Details to consider include but are not limited to tourism, proximity of other commercial or franchise locations, parking availability, traffic patterns, future development plans, etc.

          Be smart when securing funding and financing for the franchise acquisition

          Most franchisors will require you to pay a significant franchise fee to the franchisor as part of the franchise acquisition. The franchisor may require that this fee, and other start-up costs associated with the acquisition, be paid in a lump-sum at the time of franchise acquisition. Discuss the financing options with the franchisor first as many franchisors offer specific and attractive financing solutions to potential franchisees whether directly through the franchisor or through a partnership with a financial institution. If the franchisor does not offer financing, consider a bank loan through a lender you know or with whom you already have an established financial relationship. This might provide for a simpler or more streamlined loan application process. The Small Business Administration (SBA) may also have an attractive loan program available to finance a franchise acquisition and many times the rates and terms associated with an SBA loan are more attractive than what you might find on the open market. Regardless of what form or provider you use to finance any franchise acquisition, be sure to understand all of the repayment terms and seek both professional tax and accounting advice to ensure the anticipated cash flows from the franchise operations are sufficient to service the debt and all of the other costs related to franchise ownership.

          Franchise ownership can offer the support, experience and infrastructure of a large franchisor entity, coupled with the independence and flexibility associated with owning your own business and can be an attractive business model for many hard-working entrepreneurs. CCHA can be a valuable resource and partner when it comes to acquiring a franchise and we will work with you to help you reach your business goals. CCHA establishes long-standing relationships with the business owners we represent through the consistent provision of practical guidance from a trusted legal partner. If you’re considering becoming a franchisee, contact CCHA and let us help you on your business journey.