Take These 5 Essential Steps Before Signing a Franchise Agreement Doing your homework before signing a franchise agreement can be the key to franchise success.
By Roxanne Klein Edited by Micah Zimmerman
Key Takeaways
- Thoroughly research franchise locations, real estate, and brand consistency to avoid potential issues and ensure a successful investment.
- Vet the franchisor carefully, understand the franchise agreement, and consult a specialized attorney to prevent future surprises and complications.
Opinions expressed by Entrepreneur contributors are their own.
I am a little skeptical about franchises. Don't get me wrong; I have seen many successes in franchising. However, as we all know, the world is not perfect, and before jumping into franchising, there are several items I recommend researching and considering.
1. Visit existing locations
Let's start with the obvious regarding initial homework. If you are buying a franchise with physical locations, you must visit as many as possible. Keep in mind that it is likely that the franchisor may recommend visiting certain locations. Although you should visit the suggested locations, you must also visit others.
Related: Getting Out of Your Franchise Agreement
2. Pay attention to brand differences and real estate
When visiting franchise locations, paying attention to many details is important. Look out for consistency. If you see different logos, varied store designs, or, in the case of food franchises, differing menus, or, in service-based franchises, different offerings, be sure to ask the franchisor about these discrepancies.
Real estate choices matter, too. If the brand relies on impulse visits and not as a destination, visibility is crucial. If the locations are in rundown shopping centers with poor visibility, these businesses are likely to struggle.
Additionally, if the locations are not well-maintained, don't have positive online reviews, or have a bad experience, it's not a good sign. Remember that even though you won't have any direct business ties with these other franchises, you all represent the same brand. Therefore, it's essential to vet these other locations thoroughly.
Related: The 19 Covenants of a Standard Franchise Agreement
3. Vetting the franchisor
To vet a franchisor, start by reviewing the Franchise Disclosure Document, then speak with existing and former franchisees. While the franchisor may provide some contacts, it's crucial to find others to get diverse perspectives independently.
Key questions include their experience with the franchisor, plans for additional locations, and actual sales versus expectations. If possible, speak with franchisees from closed locations to understand potential issues.
Difficulty in contacting franchisees may indicate a non-disclosure agreement, which could prevent open communication. Such agreements can be a red flag, suggesting the franchisor may not be transparent about their operations.
Related: What Should a Franchise Agreement Contain?
4. Demographics and build-out costs
You also need to dive deep into what demographics the franchisor is recommended. If the franchisor has this figured out yet, it is concerning to me. It would be best if you also made sure the franchisor clearly understands what the build-out will cost and what utility requirements they have.
Most franchisors will give a range regarding costs, which will vary dramatically. Thus, you really need to ensure you are doing your homework and gathering your team of experts to assist and verify.
5. The franchise agreement
After you do your initial homework of visiting existing locations and talking to existing and, if possible, ex-franchisees, then come to the franchise agreement. This legal document should not be taken lightly.
As with all legal agreements, I recommend consulting a lawyer specializing in the specific industry. There are attorneys out there who focus on franchise law. I recommend you utilize one in this process. Although it will cost you money, it could prevent you from getting into a situation you do not understand.
When signing your franchise agreement, you must understand the agreement from top to bottom. For example, you need to know what happens if you do not find a space within the period established in the franchise agreement. Do you get an extension or lose your initial franchise fee paid? You need to know if you have any territory production. Can the franchisor sell another franchise to someone who can open near you? Most franchises will get some radius protection, but I have seen some franchises not give any. If protection is given, it is still not enough to prevent the oversaturation of the franchise within the trade area.
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Additionally, I have seen franchisors keep prime areas for their corporate stores and sell off second — or third-tier markets to franchisees. If this is the case, you are virtually competing with the franchisor, who has a better territory than you.
It is important to try to avoid surprises, and the only way to do that is not to assume anything, ask questions, and do your due diligence. If you do things correctly the first time, the likelihood that you will be able to become a multi-unit franchisee is much higher. Remember, don't feel ashamed if you do not know the answer to something. It is better to ask a question than regret not asking it.
