Buying a franchise can be a fun, profitable business venture. A franchise can get you the help you need without having to “reinvent the wheel.” If all goes right, you are investing in an already proven successful business model, with training and some of the hard work done for you.
But franchises also carry risks and significant financial expenses. That’s why when you buy a franchise, the franchisor will need to disclose certain information to you. Franchise law can get complex, and this is by no means an exhaustive list, but here are things you should look for—or ask for—if you are considering investing in a franchise.
Read on as the Chicago business lawyers at Ellis Legal discuss the legal considerations of purchasing a franchise.
Fees and Costs – Your fees and costs when you buy a franchise will generally fall into two categories: the initial startup fees and expenses, as well as your ongoing payments to the franchisor, as the franchise fee (which is usually a percentage of your revenue).
Both need to be disclosed in the franchise agreement.
In addition, you’ll want to know what is covered in the franchise fee. For example, ask about the following expenses:
Ongoing marketing costs
Initial inventory and capital (machinery, uniforms, furniture, etc.)
Down payments or deposits on rent or mortgages for physical property
If training is required, expenses related to the trainings
In some cases, you can pay a hefty franchise fee, which all goes to the franchisor, thus leaving you to pay these expenses above yourself in addition to the actual startup fee.
Some franchises, especially larger ones, will offer their own financing. Make sure you know the terms of that financing, as the terms could be better or worse than terms you could get with traditional bank financing.
Lawsuits: Is your franchisor subject to lawsuits or other claims, like government actions, which could threaten its financial solubility? You don’t want to invest in a franchise only to have it declare bankruptcy six months later.
Merchandise: In many cases, the franchisor will want you to buy your inventory, materials, and everything else, either from it or from its preferred vendors. Those may be more expensive than what you could buy them for on your own.
Obligations: Every franchise has obligations. That may be compliance with licenses, construction requirements, or finding locations for the business. Who will handle these responsibilities?
For brick-and-mortar businesses, locations can be vital. You should know whether the franchisor has market research to support whatever location you are looking to start your business at or whether you are going to be left on your own to figure out what location is best.
Exclusivity – a franchisor makes money franchising its business. It has an interest in having as many franchises as possible. You, however, don’t want someone opening the same business down the street. When you buy your business, make sure you know what area that your franchise covers—that is, what area is “protected” and considered exclusively yours.
Starting a business, including a franchise? Get the help you need to do it the right way. Speak with a Chicago business law attorney at Ellis Legal at (312) 967-7629 today.