7 Things to Consider Before Buying a Franchise: A Lawyer's Perspective

By Jonathan Mesiano-Crookston

Some of the most recognisable businesses in the marketplace today - Subway, Tim Horton's, and Home Hardware - are franchise systems. This brand-name recognition factor makes franchises very popular with entrepreneurs.

However, buying a franchise doesn't guarantee financial success. In our legal practice, we help businesses evaluate franchise systems before a deal is closed and also deal with the negative repercussions when proper due diligence is not done at the outset.

The following seven tips should help make the buying process a little less stressful, and more successful, for prospective franchisees.

1. Understand what you are buying

First of all, you aren't buying financial success. What you are buying is the right to use someone else's trade-mark and their marketing or sales system, often within a given territory.

For this reason, you should ensure the franchisor has strong trade-marks, a successful business system, and a good advertising program. If the system has many franchisees, this is often a good sign as well. It may mean greater visibility in the marketplace and also that the franchisor can generate more funds for advertising.

2. Do your homework

Check the backgrounds of the operators of the franchisor and affiliated companies. Are they new to the business? Have they been involved in other franchise systems?

Is the franchisor financially healthy? If it is a public company, see if its annual filings are available on SEDAR (for Canadian companies) or EDGAR (for American ones). If it is a private company, prospective franchisees should be given its financial information in a "disclosure document" during the sale process. (If not, see a lawyer.)

Do your own investigation, and do not rely on what the franchisor tells you. The Internet can be a gold mine of news stories and testimonials about the franchise, both positive and negative.

3. Find out what franchisees think

Probably the best way to gauge how you will be treated once you join the franchise is to ask existing franchisees how they are being treated now. Talk to as many franchisees as you can, so you are sure you are getting an accurate picture of things. Ask them how long they owned their franchise, what they paid, what they think of the franchise system, and whether they are looking to sell (and if so, why).

Determine whether the franchisor is engaged in a lot of litigation. While a certain amount of litigation is unavoidable, excessive litigation can be a warning sign. Canadian legal decisions can be accessed for free at www.canlii.org, and American at www.findlaw.com or www.justia.com. Keep in mind that many disputes are settled by private arbitration or mediation, and these decisions are not available on-line.

4. Don't buy the hype

Buying a franchise takes a lot of money and some franchisors profit from each sale. So watch out for sales exaggerations. Take all promises with a healthy dose of skepticism, demand hard data, and ask for all assumptions that underlie any financial projections you are given, in case those projections are not met down the road.

5. Know what you are buying

When you find a franchise you think you want to buy, make sure you understand exactly what you are getting. Remember, you are only buying what is stated in the franchise agreement and the lease, so check those documents carefully.

In the franchise agreement, some things to check are:

• how long is the franchise grant?
• are you granted an exclusive territory? If so, what is it?
• do you have renewal rights? If so, how long, and how are they triggered?
• does the franchisor promise training? Who pays the costs?

Some points to check in the lease are: rent amount, the duration of the lease, whether you can renew (and if so, when and for how long), how to trigger renewals, and how the rent will increase in future.

6. Understand your obligations

Franchise agreements (and associated leases) are typically long-term contracts, so make sure you know what your obligations are. For example:

• what royalties do you have to pay? Are they dependent on sales? Net or gross sales?
• how much are the advertising contributions? Can the franchisor use them only for advertising, and are franchisees entitled to an accounting?
• does the franchisor keep rebates on supplies, or are they passed down to the franchisees?
• do franchisees have a say in how the franchise is run?

7. Be sure you know your rights

Franchise law is complex and differs in each province and territory in Canada. For example Ontario law, which applies to any franchise operated wholly or partly in Ontario, has the following notable points:

• a franchisor must typically provide a disclosure document to prospective franchisees. The franchisee must be given it at least 14 days before he/she pays any money or signs anything;
• a franchisee may have certain legal remedies if the disclosure document contains inaccurate information or if one isn't given at all;
• franchisors may be liable to franchisees for misrepresentations made in the disclosure document;
• franchisors cannot stop franchisees from associating with other franchisees; and,
• both franchisors and franchisees must act with "good faith" and deal fairly with each other.

Currently, three other provinces (Alta, PEI, and NB) have enacted franchise laws, and Manitoba is currently in the process of implementing one. The others rely on contract law to govern relationships between franchisors and franchisees. Do your research and understand your rights before you enter a legal agreement.

Anyone who has questions about these items should see a lawyer immediately.

Finally, be proactive. After you have done your homework and are thinking of buying a particular franchise, consider having a lawyer review the franchise documents before you sign anything. It may avoid troubles down the road and turn out to be the best money you ever spent.

If you enjoyed this article, be sure to visit CanadaOne's current issue for more informative articles.

Article from CanadaOne

Ready to Declare Your Independence? A Seven-Point Checklist
How to tell when it's time to say good-bye to the steady paycheck

By Gwen Moran

If you feel trapped in a cubicle, the thought of being your own boss can be intoxicating. But are you really ready to declare your independence from that steady paycheck and start your own business?

California native Mark Holtzman, 57, says had reached a stage where he needed something of his own. He had hit a dead end in the small, family-owned truck dealership where he worked after more than two decades in sales. The only career progression was to become a part owner and the owners weren't offering that to him.

I had a family, wife, and kids that I wanted to at least have something for in the future and I wanted to be able to get ahead and not at the mercy of the whims of somebody else," he recalls.

As an amateur pilot and award-winning photographer, he'd been taking aerial photographs part time for a few years. He began building a clientele in aerial photos on the side and worked part time on his own growing a customer base over four years. Five years ago, he made the jump and launched West Coast Aerial Photography in Sherman Oaks, Calif. Today he earns a six-figure income and also employs his son full time.

Unlike Holtzman, would-be business owners often have their clouds. If a leap to business ownership is in your future, consider this seven-point checklist. Of course, you don't need to check off every single point on the list to ensure business success, as strengths in one area may offset weaknesses in another. And be warned, if you wait for all stars to align perfectly, you may never take the plunge.

1. Owning a business is all you can think about.

If starting your own business is all you can think about, that's a good sign to give it a shot, says Chicago-area startup expert Carol Roth, author of The Entrepreneur Equation (Bella Books, 2011). But, she warns, the reality of starting a business is often a lot harder than many could imagine.

"In some cases, people have business 'beer goggles,' " Roth says. "They see an idea and it looks really good to them, so they go for it. Then, they wake up to the reality and it doesn't look so good. You have to know what you're getting into."

2. You've done all the homework.

To make sure your business venture is more than just a pipe dream you need to have a firm grasp of what it will take to make your startup a success.

Aside from coming in with previous experience in the sector, Roth says interviewing people who've taken the plunge, reading books and articles about starting a business, and spending time studying the market and potential competition are all essential in the preparation process. If you've done that and you're still as enthusiastic about your idea, you could soon be ready to hang your shingle, she says.

3. All is quiet on the home front.

If you're experiencing personal turmoil, such as an illness or other crisis in the family, it's probably not the best time to launch a business, says Niwot, Colo., startup consultant Tommi Wolfe. If you don't have the support of those closest to you, or they are resentful of the sacrifices that a business requires, it's going to make the road to entrepreneurship tougher.

4. You've got a financial cushion and a customer base.

Before you say, as the song goes, "Take this job and shove it," it's important to have some resources, including savings and a few customers, says Roth. You need to have enough money to see you through until your business can sustain itself, she adds.

5. You can pinch a penny until it screams.

Frugality is a good trait for an entrepreneur, whether you're bootstrapping or starting out with a stash of cash.

"Do the business plan and the financial statements. Figure out how much you'll realistically be making in a year. Understand the expenses and don't be tempted to spend money when you don't need to," Roth says.

6. No one has to tell you what to do.

Are you able to get things done without someone telling you to do them? Are you constantly looking for ways to improve operations? Self-motivation is a critical quality for entrepreneurs, says Wolfe. If you have it, that's another sign that you'd do well on your own.

7. You're comfortable with being uncomfortable.

Entrepreneurs need to be able to live with the risk and uncertainty that comes with running a business, says Wolfe. If you're risk averse you will have a tougher time riding the roller coaster of business ownership, she says.

At the same time, experts say you're less likely to regret taking the plunge than never taking the chance at all.

"Most successful entrepreneurs have tried and failed many times, but they pressed on and eventually made a success of it," Wolfe says.

Article from Entrepreneur.com