Know the Law: Should I Buy Into This Franchise?

Tony Delyani Headshot
Anthony Delyani
Director, Corporate Department
Published: Union Leader
January 3, 2021
Insights - Featured Image - Corporate

Q.  I have an opportunity to buy a franchise.  If I buy, what do I actually get? How much will it cost?

AAn entrepreneur who chooses to go into business as a franchisee will immediately obtain benefits that can take years to develop in an independent business.  Those benefits include well-known names and logos; a business support system, which can include training, successful methods of doing business, and operations and employee manuals; and access to vendors for well-known products, sometimes with favorable pricing.

First-time business owners brim with questions and insecurities about how best to conduct business.  Business owners all want to succeed, but many do not know how.  An established franchise system will require that new franchisees receive training in all aspects of the business, such as hiring employees, conducting day-to-day operations, and maintaining accurate records.  Franchisors profit more from successful franchisees than from unsuccessful franchisees, so they have a strong ongoing interest in helping franchisees succeed. To protect its interests, a franchisor will require franchisees to provide periodic (usually monthly) reports of their activities, particularly financial performance. Franchisees are also subject to spot checks to determine conformity with appearance and product quality guidelines. Franchisees that do not meet a franchisor’s performance standards risk forfeiting their rights to continue as franchisees.

Access to vendors for specific products is a key consideration for franchisees.  Many customers enter a franchise location precisely because of their familiarity with the type and quality of products associated with the franchise. Only a franchisee will be able to obtain and sell those specific products, often at lower prices than an independent would pay. Purchasing inventory as part of a franchise system can create economies of scale that enable vendors to provide their lowest per-unit prices.

In nearly all cases, a franchisee must pay an initial fee – often in the tens and sometimes in the hundreds of thousands of dollars – in order to join a franchise system.  Commonly, franchisees also pay a monthly royalty of a percentage of gross receipts.  Percentages vary, but 5% to 7% is common. Many systems also require franchisees to make periodic payments into local, regional, and/or national advertising pools.

Entrepreneurs should keep in mind that operating as a franchisee is one of many forms of doing business.  Given the costs and continuous scrutiny, the benefits and burdens of franchise ownership should be weighed carefully against operating independently.

Know the Law is a bi-weekly column sponsored by McLane Middleton, Professional Association.  Questions and ideas for future columns should be emailed to [email protected].  Know the Law provides general legal information, not legal advice.  We recommend that you consult a lawyer for guidance specific to your particular situation.