Know the Law: Should I Buy into This Franchise?

Tony Delyani Headshot
Anthony Delyani
Director, Corporate Department
Published: Union Leader
September 28, 2015
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?

A.  An 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; not all know how.  An established franchise system will require new franchisees to receive training in all aspects of the business, such as hiring employees, conducting day-to-day operations, and maintaining accurate records.  A franchisor profits more from a successful franchise, so it has a strong ongoing interest in helping the franchisee to succeed. To protect its interests, the franchisor will require the franchisee to provide periodic (usually monthly) reports of its 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 the franchisor’s performance standards risk having their franchise rights terminated.

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, and at lower prices than an independent would pay. Purchasing products as one of many franchisees creates 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 becoming a franchisee is simply one way of doing business.  Given the costs and continuous scrutiny, the benefits and burdens of franchise ownership should be weighed carefully against operating independently.