To Franchise Or Not?
Tips of Buying a Business Franchise
Recently, a client named Jennifer came to my law office to complain about her franchise business, a water refilling station. She told me the franchiser (owner of the franchise), was refusing to fulfill his obligation to provide operating and training support to her as a franchisee, as contained in their franchise agreement.
According to Jennifer, this has already resulted to poor quality control of the water that her firm is selling. In turn, this has affected her sales because of customers’ complaints. Worse, her competitors have been slowly getting her market share. In short, her business has been giving her stress and sleepless nights because she has yet to recoup her initial investment.
When I reviewed Jennifer’s franchise agreement, I noticed that the terms and conditions were not clearly spelled out, especially on the training and support to her as a franchisee. In addition, when Jennifer and I did a background research, though belatedly, on the track record of the franchiser, we have found out that said franchiser has a poor reputation in the industry.
In any case, it appears that my client Jennifer had not made an independent study of the water-refilling franchise business and its risks. She also neglected to do a prior due diligence about the franchiser as she was very attracted to the supposedly high return on investment (ROI) of the business.
However, to become a franchisee of a business is no joke, even if the franchiser has already a developed system and procedures and manual to operation the business to his franchisee. It is still the same as when you are starting your own business, with its pitfalls and attendant risks as well as opportunities and returns.
So, what are the guideposts, the roadmaps that a prospective entrepreneur must look at before buying a franchise?
There are many things to consider, as there are many businesses open for franchising. But the following are the basics, without which a franchise may end in failure.
1. Conduct a due diligence by talking with existing franchisees. Ask them about their experience in dealing with the franchiser, and of the challenges and problems they face in running the franchise. Get to know the people behind the franchiser, their track record, their business reputation, their availability to help, and commitment to long-term partnership with their franchisees.
2. If possible, talk also to the suppliers of the franchiser, like their relationship with the franchiser. It is not a good idea to franchise a potato corner stand, or a burger restaurant, or a meat shop store, if the supply of potatoes, patties, or meat, are delayed.
3. Before signing the franchise agreement, make sure that the terms and conditions are clear, like the franchise and royalty fees, and that the responsibilities and obligations of the franchiser and the franchisee are spelled out in detail, so that future conflicts and misunderstanding can be avoided.
4. Furthermore, ensure that the agreement should have provisions for support and assistance to the franchisee, termination clause, transferability of the franchise, and other terms which are mutually beneficial to both parties, not only to the franchiser but to the franchisee as well.