“EXCITEMENT!” was my feeling upon buying my first franchise. Ignorance was bliss, and I blissfully became bound to a franchise. Devoid of legal support, choosing instead to rely upon the expertise of the franchisor, I willingly entered into a contract binding me for over a decade. I was ready to open and make money. And, the franchisor was ready to take my money.
The franchise system is not created to support the franchisee (i.e. the individual business owner). This is a startling realization for many (and was for me!). Rather, the system is created to support the franchisor (i.e.: the entity selling the franchise), often at the expense of the franchisee. The franchise system is structured to benefit the franchisor. The franchisee's best interests are not the primary concern. To Repeat: the franchise system is structured to primarily benefit the Franchisor.
This makes sense. The franchisor's health is of paramount importance. The franchisor must continue to succeed in order for the franchisee to exist. A successful, stable franchisor is attractive.
Monetizing: Franchisors monetize their systems in different ways. There is no one way a franchise makes money. Some franchise systems own and operate retail outlets, while some operate exclusively through franchisees. Franchise systems distribute products through different channels, such as retail outlets or grocery stores. Yet, the general goal for franchise systems is to increase outlets (e.g. grow more stores).
Synergy Between the Franchisor and Franchisee: Usually, it is in the franchisors best interest for the franchisee to succeed. If successful, the franchisee will likely grow sales, profiting the franchisor through royalties. Additional franchise units soon follow. This healthy, symbiotic relationship promotes mutual growth. Unfortunately, it represents but one end of the spectrum.
Discontinuity of Interest: Residing on the other end of the spectrum are ruthless franchisors. Ruthless franchisors do not act in the franchisee's best interest when monetizing. These franchisors focus on additional store growth at the expense of existing franchisees. Franchisees then face external competition while becoming cannibalized by their own brand through overdeveloped regions.
Ruthless franchisors terminate franchise agreements rather than negotiating a cure of default. Franchisees are a dispensable commodity and no loyalty is exchanged.
Choosing the Franchisor: Once you are a franchisee you are bound to the terms of the franchise agreement. So, at that time it is too late to alter the terms of the agreement or back out. Vetting a franchisor must occur before you are contractually bound.
So, The Million Dollar Question becomes – How to Choose a Franchise?! A topic in and of itself, this is hugely important (hint, hint: A Blog on “Vetting the Franchisor” is upcoming!).
In short, take time to conduct due diligence. Choosing a Franchise is… difficult. This is your money, your time, and your business opportunity. Analyze everything. Take advantage of your lawyer to help vet the franchise system. Bounce ideas off of a legal professional experienced with franchising.
!!!Conduct Due Diligence!!!
Contact Craig M. Morgan, Esq., Managing Attorney at Providence Law
Providencelawcarolina.com | 704.412.9450
Providence Law serves clients throughout NC.
We counsel Franchise clients throughout the U.S.