Should you buy a franchise?

September 13, 2018

should-you-buy-a-franchise

In some cases, buying a franchise can be a great alternative to starting your own business, particularly if you have limited experience running a business. The franchisor provides you with a developed way of doing business, trains you to run the business and provides ongoing guidance and assistance with operations, management and marketing matters.

However, buying a franchise does not guarantee success. You will still need to work hard, apply good management skills and serve your customers well.

Each franchise is different. It is imperative that you understand all the obligations you are committed to under the terms of your franchise agreement.

Some pros of buying a franchise

Turnkey system

A franchise system is a proven system for operating the business and generating profits. Franchises offer the independence of small business ownership supported by the benefits of a big business network.

Franchise support

Most franchises provide the training you need to operate their business model. Franchises often have an established reputation and image, proven management and work practices, access to national advertising and ongoing support.

Brand name

Well established franchises have significant market and brand name awareness, which may facilitate your sales.

Some cons of buying a franchise

Franchisor controls

To ensure uniformity, franchisors usually control how franchisees conduct business and limit the franchisee’s ability to exercise his or her own business judgement. The franchisor may retain the right to approve store locations, impose design standards, restrict the goods and services being sold and restrict the franchisee’s sales territory.

High startup costs

The startup costs for a franchise, including the initial franchise fees and expenses, such as rent, finish-out, equipment, inventory, insurance and “grand opening” fees, typically range from tens of thousands of dollars to several hundred thousand dollars.

Royalties

Most franchises require the franchisee to pay monthly royalty payments. These are frequently calculated based on the percentage of the gross income of the business.

Advertising fees

Franchisees may be required to contribute to an advertising fund. A portion of these funds may be allocated to national advertising or to attract new franchise owners, rather than to promote an individual franchisee’s business.

Termination

A franchisor can end a franchise agreement for a variety of reasons, whereas in most cases, the franchisee cannot terminate the relationship.

Renewal

Franchise agreements run for a certain period of time and often only have one renewal option. Renewals are not automatic. The franchisee will probably need to pay renewal fees and agree to new terms at the time of the renewal.

Limited exit revenue

Any purchaser of your business will also have to be approved as a franchisee by the franchisor. You may not be able to sell your franchise or obtain a large payoff when exiting the business.

Business legal issues are complex. Business owners should consult with their legal and tax advisers on such matters. For more information, please contact Kathy Tremmel at Tremmel Law, PLLC at (512) 539-0317 or kathy@tremmellaw.com.

Kathy Tremmel

Tremmel Law

Kathy Tremmel has significant experience both as a business attorney and corporate executive. Her career spans both legal practice and business management and she opened her own solo law practice in January 2010. In additional to running her own practice, she also is of Counsel with Selman, Munser & Lerner, which is a business transaction law firm in Austin, Texas. Ms. Tremmel has more than 10 years’ experience as a business attorney, providing transactional legal services to a diverse client base, from start-up ventures to well established companies. She helps companies with all their contracts, including customer agreements, non-compete agreements, employment agreements, buy-sell agreements, loans, and leases, helps people set up new businesses, and represents buyers and sellers of businesses. In addition, Ms. Tremmel has 10 years of management experience working with start-up companies. As VP of Operations at Tusker Group, an international litigation support company, Ms. Tremmel led international teams, managed production and quality issues, handled price negotiations, worked closely with clients to determine the scope of their projects, provided project management services, and developed, implemented and documented best practices for processing and training. Ms. Tremmel earned a Doctor of Jurisprudence from the University of Colorado School of Law and a Bachelor of Arts from Dartmouth College. She is a Texas licensed attorney and a certified Project Management Professional.
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