When buying into a franchise, a question that most...
Many prospective franchisees regret not taking the time to properly investigate one of the biggest financial decisions they will ever make. Franchise Agreements are generally one sided in favour of the franchisor, hence the need for franchise legislation, as recognized by many provinces (Alberta, Ontario, etc.). Relying on a franchisor’s disclosure document is not enough. Prospective franchisees are encouraged to take it a step further.
Agreements that are clearly “home grown” may indicate that the franchisor has not taken the time or incurred the expense of employing an expert in franchise law to ensure that its documents confirm to the minimum requirements. This could also be an indication of likely disputes in the future over interpretation of the franchise agreements.
Franchisors whose primary income is from franchise fees, transfer fees, retention of volume rebates and resale of failed locations should be avoided. Look at the default provisions of the franchise agreement. Does the franchisor allow for notice of default and time to cure what could have been an innocent mistake? A franchise business should want to see you succeed and grow with you rather than benefit from your failure.
Are there extensive requirements? If so, you may be dealing with an overly controlling franchisor.
Beyond the disclosure document prospective franchisors are encouraged to contact existing franchisees who have been involved in the franchise business for various lengths of time. Analyze the experience of newer franchisees against those of long standing franchisees. Does the communication and support drop off significantly after a franchise business owners' are “hooked”?
The franchise business that is willing to answer questions, meet face to face or allow you to speak to employees directly is more likely to continue to be cooperative once agreements are signed then one who is unresponsive before even securing your commitment to the franchise.
Another indication of a good franchisor is one who provides a prospective franchisee with advantages that it is not required to. For example, providing a disclosure document in provinces where it is not required, allowing a prospective franchisee more than the minimum 14 days to consider the disclosure document, not taking advantage of an exemption to providing disclosure when one is available or providing a further “cooling off” period when a statement of material change is provided.
Remember that the internet can be a powerful tool. Search the franchisor in all jurisdictions that it operates. Speak to lenders, suppliers and others who deal with the franchisor on a regular basis for a better understanding of how the franchisor operates.
Most importantly, seek the advice of professionals who have experience with franchise business. A good franchise lawyer and accountant can save you much in the way of headaches down the road. Sometimes the best advice you can receive is not to buy into a franchise at all.
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