Last week we went through the first half of the Franchise Disclosure Agreement and what to look for. Here we breakdown the other half and tell you what to look out for before signing on to be a franchise owner.
You’ll definitely need support from your franchisor in your business, this area will tell you exactly what you can expect. This will also outline where your marketing fees will be going, and it should let you know how involved you’ll be in managing the national marketing fund. You should be involved in some of the marketing decisions that get made for your franchise.
This tells you what your territory is and whether or not other franchisors can open in the same area. Some types of franchises offer exclusive territories and others don’t. If you’re hoping for exclusivity, this is the section that will tell you what you can get.
Items 13 and 14
These are your trademark and copyright restrictions. This section should be very straightforward unless your franchisor doesn’t have trademarks (which would be a red flag).
Your franchisor wants you to be devoted full-time to their business. This section will tell you whether you need to be the one running the business yourself or if you can be a passive owner and hire someone else to manage the day-today- business.
This will tell you what you can and cannot sell. You should already know this based on your previous research.
Here you will find a chart that explains your relationship to the franchisor, including terms of renewal and termination. It will also tell you how the franchisor deals with disputes. Some methods (like arbitration) could be costly. You should also feel free to contact a franchisee and ask how the franchisor has settled disputes in the past. You should also be aware that as a franchisee, you’re not the one renewing. You only have a right of first refusal when it comes time to sign a new contract.
This will only matter if you’re buying into a franchise that uses public figures in their advertising (hint: that’s less than 1% of franchises so you probably don’t have to worry about it).
You could say this is one of the most important things in the franchise disclosure document. This will tell you what other franchisees are making. Not every franchisor disclosures this information, but if they don’t they have to state so here. Make sure you’re comparing franchisee earnings to stores similar to the one you’re thinking of opening. Stores that are in similar areas and have recently opened. Locations that have been in business for 5-10 years won’t be an accurate barometer of what you can make in the early days.
This should give you an accurate picture of the overall franchise network, and whether it’s getting bigger or smaller. This will also give you a list of current and former franchisees, which you should feel free to contact to get advice on opening your own location.
Good old financial statements. You’ll find a profit and loss statement and a balance sheet. You may want to get your financial advisor to look at these reports and let you know if the franchise you’re buying into is stable and profitable.
Item 22 and 23
These are all of the contracts you have to sign as well as the receipt for the actual franchise disclosure document. Make sure you understand everything you’re signing. Get your lawyer and financial advisor involved to help make sure you’re making a sound investment.
If you’re happy with your franchise agreement and there’s nothing out of the ordinary in the franchise disclosure document, congratulations! You’re well on your way to being a small business owner. If you’re thinking about opening a franchise, or franchising your current business, get a free consultation today and we can help.