4 Great Tips (And 1 Bad One) on Buying a Franchise
(FranchisePick.Com) If you’re considering investing in a franchise, you should pay an experienced franchise attorney to review the franchise disclosure documents, scrutinize it, and go over it with you section by section. If you’re in Iowa, you may want to consider hiring attorney Rush Nigut (pictured right) for the task.
I don’t know Mr. Nigut personally, but I just perused his Rush on Business blog which is very nicely put together and contains good content on a variety of subjects, including franchising. On the plus side, Rush seems new to franchising (still excited), is very clean cut and Iowa-esque, and was willing to spend a few bucks creating a well-designed blog with good content. Plus, he coaches Raccoon Valley Little League. On the negative side, Rush seems new to franchising (perhaps not cynical enough yet), has not yet discovered FranchisePick.Com (we’ll help with the cynicism), and is named Rush (which I equate with either the annoying heavy metal band or the annoying heavy radio loudmouth.)
This past week R. Nigut attended the ABA’s Forum on Franchising, and took away some key points he from a presentation on how to buy a franchise delivered by Ron Gardner of the Dady and Garner Law Firm in Minneapolis. Five key pieces of advice for would-be franchisees delivered by Gardner are: 1) Get all representations in writing, 2) Hire an attorney to get to know you, your goals, etc. as well as review the deal, 3) Run away from franchisors that won’t negotiate, 4) Thoroughly scrutinize key disclosure issues, especially closures & transfers, and talk to franchisees, and 5) Be willing to walk away.
I strongly agree with four out of five of these points, but disagree with #3, at least in the way it’s presented in this post. If Gardner meant that each franchise prospect should be able to negotiate the terms of his/her individual agreement, this makes no sense to me. Why would you sign with a franchisor who has to do such a thing in order to close a deal? Why would a franchisor want to have all sorts of variations out there, and not knowing who’s paying what, having different enforcement standards for different franchisees, etc. I have worked closely with ethical, franchisee-oriented organizations that would not negotiate or modify the franchise agreements whatsoever. All franchisees got the same basic deal, and operated under the same terms and conditions that were enforced consistently. In fact, I’d be skeptical of a franchisor willing to change its program just to close a sale.
In context, Gardner may have been voicing the AAFD’s contention that franchise agreements should be constructed with input from and negotiations with existing franchisees (not necessarily negotiated individually). I still think this point is a bit overemphasized. In my opinion*, the point should be that if there are unfair contract provisions you can’t live with, walk away.
* Point 6 should be, when seeking legal advice, always listen to the marketing guy.
In his post Fundamentals of Franchising: Franchisee’s Perspective, attorney R. Nigut shares:
Some highlights of Gardner’s talk:
- If a franchisor is making certain promises you should attempt to have those promises included in the franchise agreement. Often a franchisor will say certain things to entice a franchisee to enter into the franchise agreement. But when you read the agreement these promises are no where to be found. Get those promises in writing. If not, you should have no expectation the franchisor will follow through on its promises.
- Franchisees and their lawyers must communicate together on much more than just the franchise disclosure document or the franchise agreement. In order to advise you properly it is important to know your background, your needs and your expectations. Without this information it is often difficult to know what it important for you in a negotiation and what is not.
- Run Away from Franchisors that Won’t Negotiate. Some franchisors will tell you that they won’t negotiate their agreements, or worse, tell you the laws and regulations do not allow them to negotiate their agreements. Tell them to take a long walk off a short dock! Ask youself whether you want to be in business with a franchisor that will not consider your busines goals and needs. Fortunately, my experience has been that many franchisors will negotiate at least certain key terms and conditions.
- Key Disclosure Issues. Key disclosure issues generally include litigation, initial investment, vendor rebates, earnings, outlets and financial statements. It is important to closely review the information regarding outlets. Carefully study the number of transfers and not just the number of closures. A high number of transfers may be an indication that franchisees in the system are struggling but bad stores have not been shut down. As I have preached franchise due diligence must include interviews of franchisees, including those that have left the system, in order to get a full picture of the franchise system.
- Be Willing to Walk Away. I have touched on this before. This is the paradox of negotiation. You should not fall in love with the deal. Prospective franchisees who are willing to walk away usually get much more from those who have decided to sign at all costs.
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7 opinions for 4 Great Tips (And 1 Bad One) on Buying a Franchise
4 Great Tips (And 1 Bad One) on Buying a Franchise at PIGASYS
Oct 18, 2007 at 11:48 am
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Rush Nigut
Oct 18, 2007 at 7:46 pm
Thanks for the link and the kind words. (Iowa-esque is kind, right?). I understand your position regarding negotiation on behalf of franchisees. From a franchisor perspective it makes sense to have uniform agreements and programs. But I am sure you would agree there are two sides to each franchise agreement. Franchisees have their own goals and needs when they enter into a franchise agreement. The point is that if a franchisor will not consider the goals and needs of the individual franchisee - how good of a business partner will the franchisor end up being? In other words, why not a win-win approach rather than a take-it-or-leave-it-approach? Fortunately many franchisors understand win-win is the better approach.
I don’t pretend to speak for Ron Gardner but the context was not as you described. Naturally you have to give to get (something else Gardner discussed). A franchisor is unlikely to substantially rewrite an agreement? The franchisee must be prepared to make concessions. But usually there are two to three points which are worth talking about that may help the individual circumstances of the franchisee without throwing the whole franchise system into disarray. Maybe you have overreacted to the point?
Do you really believe that every franchisee has exactly the same wants, needs and goals as every other franchisee? Let me give you an example:
A prospective franchisee client I represented was considering a franchise opportunity. At the same time he also knew he planned on buying a second, unrelated franchise so his son could operate that particular franchise. The franchise agreement prohibited the franchisee from soliciting clients after the franchise agreement ended - no exceptions. The franchisee planned on marketing the second franchise to his clients in the first franchise. If the franchisor had not negotiated the language he could not have done this and the franchisor would have lost the prospective franchisee. The franchisor did change the language and it was a win-win. The franchisee got what he wanted and the franchisor got the sale without any harm to its system. Under your theory, the franchisor would not have negotiated and both would have gone their separate ways. It is dangerous to take the one-size fits all approach.
Rush
sean
Oct 18, 2007 at 10:32 pm
Rush:
Welcome to FranchisePick! As a fellow Midwesterner, Iowa-esque is certainly a compliment.
Actually, my disagreement with the negotiation point was with it being so absolute: if they have a policy of not negotiating the contract, run in all cases. That doesn’t take into account whether it was a fair agreement to begin with, or which changes are being requested. Also, non-negotiation doesn’t necessarily mean inflexibility. A franchise consulting firm I worked for taught new franchisors not to negotiate substantive elements of the contract. They wouldn’t negotiate important elements because that’s what they were taught. Things like territory boundaries, or the example you cite, would be fine to negotiate.
You’re right… I came back absolute the other direction. I think he’d be better off advising to walk away if you don’t get a sense that the FR is genuinely interested in the franchisees’ success.
I’d suggest that an additional issue for potential franchisees is the franchisor’s long term involvement. One may buy a franchise from the loveable Ben & Jerry, but end up answering to Unilever. MBE franchisees ended up being strongarmed to convert when UPS bought them, then ended up having to compete with their own franchisor.
It’s a tough biz, but thanks to blogs there’s lots of good advice and info to be found. I encourage FP readers to check out the growing legal resource at http://www.rushonbusiness.com.
Joel Libava
Oct 19, 2007 at 10:35 am
Sean and Rush,
Franchise agreements of course are Franchisor friendly. When I do seminars, I always strongly remind future franchise owners that the franchise concept they may be interested is NOT THEIR CONCEPT. If they were the Franchisor, they would get to choose the royalty percentages, the territory sizes etc. If one is not willing to invent the system, invest the proper amount of money that it takes to BE a successful A FRANCHISE COMPANY {a LOT!} , then they do not get to make the rules, including the franchise contract.
Not negotiable, as it shouldn’t be.
Joel Libava
The Franchise King Blog
Fan of Sean’s
sean
Oct 19, 2007 at 12:00 pm
Joel makes the point more clearly than I did… When I was part of management of a growing franchise concept, a prospect wanting to make substantive changes to the agreement was a red flag that this might not be a good franchisee. If they wanted to make changes now, would they comply with required operational procedures and standards, etc. or would they be tinkering with the recipe? We had put together a program that worked for both sides, and were looking for those who wanted to duplicate - not tinker with - the system.
Of course, this was a very good franchisor. I think it’s a matter of degree. But Joel makes an important point: find a system you believe in AS IS, and a franchisor that knows the business and demonstrates commitment to growing unit level sales (not just franchise sales). Once you’re on board, follow the system and listen to the advice you paid for.
Joel Libava
Oct 20, 2007 at 7:28 am
Thanx, Sean..
Maybe my comment was put more clearly than yours, but the point is, and I know you agree…The Franchisor has the power..contract wise.
More and more franchisee associations are springing up, which will help the franchisees, but a contract is a contract.
Joel Libava from “The Rock and Roll Capital of The World”
Go Indians!
franchise tips
Jan 10, 2008 at 4:26 am
I could just watch the show because I am yet to play the Franchise game. Any how this looks fair.
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