Month: August 2023

August 18, 2023

When it comes to whether you are more likely to be successful as a franchisee than owning an independent business, studies have gone in both directions over the years (and as far as we know, there has not been any recent study on the question). 

How successful are franchises? Success depends on the type of business involved, as well as who the franchisor is and what sorts of services they provide to franchisees. That said, franchisors often tout certain benefits associated with franchising as opposed to opening an independent business.

Three Considerations for What Makes Successful Franchises

For analysis, our experience as franchise attorneys has led to the following ruminations.

1. Proven Model

Franchisors and franchise brokers often market franchise opportunities by focusing on the fact that there is a “proven model.” This is not always the case, however – at least in any meaningful sense. A newer franchisor, for example, may have operated a very successful corporate location for years, but that does not mean it will translate into success for a franchisee. Corporate-owned locations, for example, often have fewer expenses than franchisees, giving them more capital to spend on marketing. Moreover, what works in one area may not work in another – an Italian ice business, for example, may have a model that works in Arizona, but that model may not translate to colder weather climates like Minnesota. If the model does, in fact, work, then a franchisee may be more likely to succeed than an independent business owner, but that is a big “if.” 

Prospective franchisees should speak with as many operating franchisees and former franchisees as possible, using the list provided as an exhibit in the franchisor’s disclosure document, to find out whether the franchisor’s model is indeed well-formulated and resulting in franchisee success. Prospective franchisees should not look at the number of new franchises a franchisor is establishing as evidence of success. Rather, the measure of success should be how happy the established franchisees are with the franchisor, its system, and its ongoing support, and what former franchisees have to say about the system.

2. Trusted Brand

Prospective franchisees frequently believe that they are buying into a trusted brand. This belief is not always true. In some instances, a prospective franchisee may buy into the hype even when a franchisor has few locations and little brand recognition. Of course, everyone knows the McDonald’s brand, but there are franchisors that jump into the franchising world with little to no brand recognition at all. A justification for paying initial franchise fees and royalties is that the franchisee is getting to use the franchisor’s brand. Prospective franchisees, however, must be careful in evaluating whether or not the use of the brand is going to benefit them or be worth the costs associated with becoming a franchisee.

3. Support and Training

Marketing materials aimed at prospective franchisees often tout the support and assistance that a franchisor will provide. There are franchisors that do provide such valuable assistance and training, but franchisees are frequently surprised to learn that the franchisor generally has very few (if any) obligations to provide ongoing support after the franchisee opens for business. So while support and assistance is there in some cases, in others, the franchisee may get no support or assistance and the franchisor will still be in compliance with the franchise agreement and entitled to ongoing royalties. In other words, prospective franchisees should not count on ongoing support from the franchisor to be successful and should pay close attention to the franchisor’s actual obligations in the franchise agreement. 

Get Legal Peace of Mind

If you are considering buying a franchise, the attorneys of Garner, Ginsburg & Johnsen, P.A. know what makes a franchise successful from a legal perspective. If you want peace of mind, hire our experts to review your Franchise Disclosure Document and Franchise agreement for one flat fee while also getting time built in for a consultation of negotiation with the franchisor. Schedule your consultation today.

August 18, 2023

The answer to how much purchasing a franchise costs is, of course, dependent on a variety of factors. The problem is that many prospective franchisees think of the initial franchise fee and buildout costs as the sole costs to open and begin operating a franchise. Unfortunately, that’s not the case.

Is It Cheaper to Buy a Franchise or Start Your Own Business?

It varies, but owning a franchise may not be as reasonably priced as you might assume. The initial franchise fee (which can range from $10,000 (or less) to $100,000 (or more) and buildout costs usually constitute a significant portion of what it will cost to purchase and open a franchise. They are not, however, the only costs associated with opening. 

How profitable is owning a franchise? It can take a while to recoup your initial investment before making a profit — if you make a profit. Franchisors are required to include estimated opening expenses and franchisees frequently rely on these estimates to their detriment as representative of all startup costs. The opening expenses are going to vary by location and even on the timing of when the expenses are incurred. A franchisor’s disclosed estimated expenses to open from the prior year may not be reasonable for every franchisee. 

It is important to consider the opening expenses on your own and talk to contractors, other franchisees, and others with experience in the industry on what the actual cost will likely be. This is not to say that franchisors intentionally lie (although this has happened), but the variability of buildout costs is such that estimating them for a franchise system with units all over the country is going to result in such uncertainty that you should conduct your own due diligence on expenses to open.

Beyond How Much It Costs to Purchase a Franchise

In addition to initial fees and buildout costs, franchisees often have to purchase inventory or equipment directly from the franchisor or from required vendors when they open. This can result in higher costs for inventory and equipment because the franchisee is required to purchase from the franchisor’s designated source of supply — there is no shopping around for the vendors that can provide the best services or goods while accounting for cost. Franchisors can usually generate a profit from sales of goods and services to franchisees, so a franchisee may end up paying more for inventory or equipment than they otherwise would.

There are also likely to be architect fees and, in some cases, engineering fees. These can both vary dramatically and be quite expensive.

In addition, landlords may charge rent before the franchisee even opens for business. This could be a sizable cost, among the most expensive and overlooked when considering how much it really costs to purchase a franchise, so it is important to consider not just the obvious expenses, but related or indirect expenses as well.

Finally, one possible expense that franchisees frequently overlook, is the expense associated with the obligation to remain open and operating for the life of the franchise agreement. The franchisor is only required to include estimated operating expenses for the first three months in its disclosure document. This does not mean, however, that a franchisee should expect to turn a profit or even break even after that initial three-month period.

Just about every day, we hear from franchisees that are losing money on a regular basis — they tell us that they want to just close down and move on. When you own a franchise, however, it is not as simple as cutting one’s losses and shutting down — abandoning the franchise is a breach of the franchise agreement and can result in the franchisor suing for and recovering lost future profits (e.g., the profits it would have generated from royalty payments had the franchisee continued to operate throughout the entire term of the franchise agreement). This is potentially a huge expense and must be accounted for when conducting due diligence.

Get Proven Legal Support Before Investing in a Franchise

If you want to purchase a franchise, get legal expertise from Garner, Ginsburg & Johnsen, P.A. Contact us today to schedule a consultation. Our franchise lawyers have years of experience and an excellent track record of getting positive outcomes for our clients, helping them get the most from their business investment.