Franchises: How to enter a franchise agreement and why some fail

Entering a franchise agreement isn’t some fly-by-the-seat-of-your-pants decision. A decision to purchase a franchise should only come after a great deal of seeking sound advice, careful planning, and time to make such a huge decision. When all of your planning is complete, make absolutely sure you are comfortable with your decision to purchase a franchise. If you have any misgivings whatsoever, don’t buy the franchise! Most franchises are usually grouped into any one of the following categories:

• food and hotels – restaurants, fast food, bars, frozen yogurt, or ice cream
• retail – electronics, sporting goods, shoes, clothes
• personal services – fitness clubs, beauty, hair, tanning, and nail salons
• property services – plumbing, heating, air-conditioning, carpet cleaning,
• automotive – oil change, car wash, car dealerships, gas station, auto repair
• business services – tax preparation, accountants, office supply, printers

Of course, there are pros and cons to each type of franchise. Some have flexibility regarding their ownership, at the same time other companies offering franchises aren’t so flexible. It all depends on how the franchise agreement is written. A franchise agreement defines the terms and conditions that govern franchise ownership according to the franchisor. Before you sign a franchise agreement, look closely at the details of the agreement. It’s advisable to take the franchise agreement to an attorney to read and offer advice.

Additionally, be sure to ask the franchisor specific questions about the franchising opportunity. Here’s a list, though not a comprehensive list, of questions to ask the franchisor:

1. How much does the franchise fee cost? Is there a portion of the fee that’s refundable?
2. Is there an initial inventory of supplies or products included with the franchise? Which party is responsible for paying for the initial inventory?
3. What are the terms of financing? Are there any options for financing?
4. Who is responsible for determining the site location?
5. What percentage of the promotion and advertising costs are the responsibility of the franchisee? The franchisor?
6. Are bookkeeping/accounting services available or included in the purchase of the franchise?
7. What kind of training, if any, does the franchisor offer? How much training will I receive?
8. What’s the necessary amount of working capital for the franchisee to have in order to keep the franchise going until it starts turning a profit?
9. Are the premises purchased or leased?
10. Are other franchisees permitted to open a franchise in the immediate vicinity now or at a later time?
11. Which party is responsible for setting hiring procedures?
12. Will the franchisor have the absolute privilege of terminating the franchise agreement if the franchisee fails to meet the terms and conditions of the agreement?
13. Are there any circumstances or conditions under which the franchisee can terminate the franchise agreement?

Sure, it seems like a headache to ask all of these questions and more. But this is your financial future you’re dealing with. Again, the previous list is not comprehensive. That’s why it would be a good idea to speak with an experienced franchise attorney to guide you through the franchise buying process.

Common reasons why franchises fail

Not every franchise turns out to be successful. Franchises that fail often overlook simple details that should have received the buyer’s attention before purchasing the franchise. One key element is tied to whether the franchisor disclosed their finance books or not. A potential franchisee should be able to find out to the penny what the monthly profit/loss statement is for the franchisor. Not every franchisor would be quite so willing to open their books. Nevertheless, it’s important to do a thorough investigation of the franchisor’s financial position before investing with the franchisor.

Additionally, most franchisees fail due to one or more reason listed below:

1. Hiring advisors with little or no experience in the type of franchise you want to purchase simply because it “saves money.”
2. Neglecting to consider legal matters thoroughly.
3. Failing to verify what the franchisor tells you about the franchise.
4. Failing to speak with existing franchisees.
5. Failing to find out why other franchises failed.
6. Not developing a solid business plan and sticking to it..
7. Failing to conduct market research.

Protecting your investment

Most of all, don’t forget that owning a franchise is a risky business. It’s happened that some franchisees have fallen victim to fraudulent franchisors wanting to make a quick buck off of anyone they can. They might not divulge their financials completely. Maybe they make promises they don’t intend to keep. The potential for danger lurks everywhere when purchasing a franchise. Make sure you have a trusted advisor on your side who knows what questions to ask and what pitfalls to avoid when looking to enter a franchise agreement.

Above all, never forget that franchising is a business…and a risky one at that. Many franchisees have been victimized by fraudulent franchisors and marketing ploys. From unfulfilled promises of support, to not completely divulging the financials of the franchise, there are pitfalls everywhere. Therefore, it is important to have experienced advisors on your side, ask the right questions, and take your time when choosing the right franchise for you.