Buying a Franchise
Franchising works. Some of my biggest clients are millionaires who made a living by working hard to build up their franchised units.
Franchising fails. Some of my saddest cases have involved unprepared folks who leveraged their homes, looted their 401k’s, and bought the wrong franchise in the wrong system at the wrong time. They lost everything. Typically, they saved money by not having a franchise attorney review their contracts.
What You Should Do. Make sure the franchise that you are considering buying is a good fit. A client who had a been a career accounting manager for the phone company once paid over $200,000 to purchase the area rights for a janitorial franchise that required him to sell, sell, sell. He had never sold anything in his life and was completely unequipped emotionally to cold call customers. It took some doing, but we undid his deal. However, he never should have bought a franchise like this in the first place. Naturally, he had not used counsel when he entered into the deal.
Once you have identified a franchise that seems like a good fit, drill down on the business issues:
• Is there a market for this?
• Can the market or the brand grow as conditions changes?
• Are existing franchisees making money, or barely making it?
Once you have satisfied yourself that the franchise has a solid business that fits your skill set and goals, call us.
Why You Should Hire an Attorney. Because you are quitting your job and investing your life savings into a new business. The franchise broker means well—but he gets paid by the franchisor only when you close the deal. The Franchisor may be hopeful about their business, but they have an unproven track record and they need to close your deal to make their numbers this quarter. The Franchise Salesman that you trust and like—he just put in his notice and is going off to work for his fifth company in three years. But, he’ll still get his commission when you close. You should hire an attorney because he is the only one in this transaction looking out for you—and the only person who is getting paid whether you close the deal or walk away.
What Should You Pay To Have An Attorney Review Your Franchise Documents? The American Association of Franchisees and Dealers, a franchisee organization, recommends that you spend 2% of your proposed investment on due diligence. So, for a total investment of $200,000 (franchise fee, tenant improvements, equipment, inventory, etc.), $4,000 in attorney’s fees to review the franchise disclosure document, recommend and negotiate changes, and review a lease is entirely appropriate (and prudent).
Depending on the scope of the transaction, we typically request a $2,500 retainer to review, comment on and negotiate a franchise agreement. More limited options include a 2-3 hour review of documents, and then a one hour consultation to answer your high-level questions, all for less than a $1,000.