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Franchisee Advice

Ten Good Reasons Franchise Buyers Need a Lawyer

Before you sign for that franchise, have a pro read the fine print.

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Finally you’re poised to become an official franchisee.

You’ve completed due diligence: researched potential firms, found a product that ‘fits’ with your interests, interviewed ten to15 other franchisees to hear the pros and cons. You’ve narrowed it down to the business you favour and it’s time to sign on. Then, the franchisor provides a copy of the franchise disclosure document and agreements.

Whether you understand it or not, once you sign, you are legally obligated to uphold all the document’s provisions. Now is when you need to consult a lawyer. Too often they aren’t called in until there’s trouble, but with your buy-in fee at risk, it is well worth the extra cash for an expert’s oversight.

But not just any expert. Go to a specialist. Anyone looking to open a franchise should get professional advice either from an attorney or from a franchise firm that has some experience in the field. Your local general practitioner isn’t going to have a clue what they’re looking at. A franchise attorney knows what to look for, otherwise it’s a waste of time and money. You don’t want to pay them to learn.

Talk to My Lawyer

In case you’re still hesitant, here are ten good reasons to bite the bullet and invest in legal counsel.

1. Setting Up the Business Entity

For tax and liability purposes you have to establish a formal business. Whether you decide to operate as sole proprietorship, limited or general partnership, private entity, etc, the lawyer will work with your accountant to help you choose the arrangement that will best protect your home and personal assets from liability claims and ensure your proper percent of the profits.

2. Plain English

When you read it, you may not always get the details of the deal; the lawyer reads the documents and explains. Attorneys are familiar with the terminology, recognising standard conditions and clauses and alert to red flags when there are unusual demands or missing critical items. In evaluating the company’s track record, one warning sign is litigation history. Your lawyer will be wary of any past lawsuits or bankruptcy filings involving the firm or its principals.

3. Looking for Negotiables

The franchisor holds the cards; you are the franchisee and there’s not much leeway for discussion. With the playing field tilted in the franchisor’s favour, the lawyer’s job is to level it. Depending on the company’s leverage – how long they’ve been operating, the extent of their business and experience, how eager they are to expand – some franchisors may soften some of the terms. While the monthly royalty and advertising fees you’ve assessed are probably set in stone, there might be room for concessions on time deadlines for your start-up date, ‘grand opening’ support and how much time you’re allowed to correct transgressions before they call a default.

4. Setting the Boundaries

The size and extent of the sales territory you are granted is critical to protect you from undue competition. The lawyer clarifies the extent of your dominion, determining the geographical area and demographics you’re granted for your outlet. How many kilometres is its radius? Are the boundaries guaranteed? What exclusivity or protection is granted? Do you have the right to relocate if your lease expires or if your shop turns out to be in a bad business location?

5. Support

The franchisor agrees to provide back-up support for your fledgling business and the lawyer helps spell that out answering questions such as: What kind of instruction will you get? How many days or weeks will it take? Will it occur at headquarters or close to your home? If away, who pays travel? McDonald’s, for instance, requires nine months of on-site training.

Once you’re up and running, how much will the franchisor monitor your business? Does the company provide a free operations manual and how often is it updated? What restrictions specify details of remodeling, redecorating, obtaining supplies, uniforms or ‘trade dress’?

All franchisees are required to contribute to the advertising fund. This must be carefully worded regarding possible challenges to how ‘advertising’ is interpreted. Is it brochures? Flyers? Booklets? Media ads? Local or national? Who pays for the company website, is it supported by the firm or by the advertising royalties?

6. Disputes About Performance

Both you and the franchisor are expected to honour the letter of the arrangements between you, and clarifying default conditions is a critical element of protecting you if something goes wrong. What happens if one of you doesn’t perform up to par?

Failing to pay royalties or to uphold franchise standards are common areas of dispute. Are you expected, for example, to pay a minimum Management Service Fee each month whether or not you meet your required gross sales? Careful legal language is required to ensure your ability to cure a default.

7. Renewal and Termination

While you may be entering the franchise gung ho, the lawyer steps back and considers what happens if something goes wrong.

  • Under what circumstances can either you or the franchisor end your relationship?
  • Can you be dismissed if you fail to meet performance levels or if the franchisor merely decides to move from that location?
  • Can the franchisor cancel your agreement if you lose your lease?
  • Are you planning to be able to renew when your current agreement expires?
  • If so, are you required to remodel?
  • What rights might you have to sell or transfer your franchise location to someone else?
  • Would the franchisor have a right to veto potential buyers?
  • What about disabilities and death?
  • If your franchise fails, will the franchisor be required to purchase your inventory and supplies?
  • If you terminate, will you be able to pursue other business opportunities without undue hardship?
  • On the other hand, what provisions are there if you decide you want to expand to additional franchises?

A good franchise can help fulfil your dreams but you have to keep your eyes wide open – and two sets of eyes are better than one. Typically a franchisee has already identified a franchise concept and fallen in love. At that stage, it is very useful to have someone who is detached review the agreement and look at the system non-emotionally to be sure you understand the commitment you are facing.

8. Dotting the Is, Crossing the Ts

Once you’ve decided to go ahead and buy the business, the lawyer oversees the paperwork before you sign, preparing the asset or stock purchase agreement along with other documents that may be required.

9. Negotiating with Other Parties

In setting up a business, you’re apt to be hiring contractors, arranging deliveries with suppliers, employing staff. A lawyer helps work out the stipulations and clarifies responsibilities. For instance, when you’re leasing a business site, a lawyer may alert you to the required language that ensures you’re allowed to post signs and logos on the property.

10. Managing Dispute Avoidance and Conflict Resolution

Despite the care taken in drafting agreements, disputes do arise. Some common issues calling for litigation include lying about earnings, failure to provide ongoing training and support, terminating the franchise and enforcing post-term obligations.

In starting your search for a lawyer, word of mouth can be a very effective first step, so ask friends and colleagues for referrals. Then, do some research on the Internet. Besides legal firms specialising in franchise law, potential franchisees can also consult with search firms and brokers that specialise in matching up franchisors and franchisees. Additionally you can turn to FASA for a list of suppliers as well as some advice.

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Franchisee Advice

Types Of Funding Available For Franchisees

If you’re interested in investing in a franchise, there are a number of funding routes available to you.

Darlene Menzies

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In South Africa, a franchise is considered a separate, specialised field of business and from a financing perspective is viewed differently to an existing business. It’s typically easier to get funding for a franchise as franchises have a proven product and they vet potential franchisees and offer support to new business owners. This support can include extensive training on running the franchise, branding and marketing, operational policies and procedures and a highly-tuned supplier network.

The reputation of the franchise will, to a large extent, dictate which finance options you choose and how easy it will be to raise the required funds.

It’s important to understand the cost of purchasing the business and the expected operating costs to work out how much finance you’ll need until the business starts to generate profits. Be clear about the upfront costs, including access to the brand, the market structure, start-up support and the set-up fee, which usually includes construction, equipment, stock and other necessary resources.

Related: 6 Great Tips For A Successful Shark Tank Pitch

Consider the operating costs, which must include management service fees and franchise marketing and advertising levies. The franchisor will advise you on the time it should take for the franchise to start generating profits. Upfront costs plus operating costs are the total amount of finance required to purchase, set up and run the franchise.

What’s available for prospective franchisees?

Franchisor Funding

Many of the large franchisors have their own funding mechanisms. These can range from their own established finance arm to funding assistance through partnerships with external lenders. Franchisors seldom fund 100% of the purchase costs; the amount of funding varies according to the size and reputation of the franchise and usually ranges from 25% to 75% of the costs.

Once a franchisor approves you as a franchisee, your chances of being approved for funding are significantly stronger. Some franchisors go a step further and suggest a business partnership with another potential franchisee who has good financial resources but less experience. Pairing experience with finance can be a useful option, but needs to be explored properly as it is a long-term partnership that must work for both parties.

Tandem Funding and Specialised Franchise Funders

South Africa’s B-BBEE legislation has led to a new option for franchise funding. It’s a particularly innovative way of quickly upskilling inexperienced potential franchisees. The franchisor funds the new franchise and retains ownership of the majority of shares in the business.

The franchisee initially purchases a small number of shares and is then mentored by the franchisor to set up and run the franchise. Profits are used to buy more shares until the franchisee has purchased all the franchise’s shares.

Specialist franchise funders are also a useful option. They typically consider a wider variety of franchises than banks and have in-depth knowledge of the industry. However, like other funders, their primary concern is to be sure that the loan will be repaid within the required period.

Related: Expansion Funding Options For Your Growing Business

Franchise Funding from Banks

franchise-funding-from-banksAll of the large banks have specialised franchise funding departments. Their approval rate for funding franchises is generally higher than for independent businesses.

Banks will expect you to provide a sizable contribution toward the purchase of the franchise and funding is dependent on proof that the business will be able to repay the loan.

Other factors they consider are the location of the business and its proximity to competitors and catchment markets, your level of business experience, your credit record and the amount and type of support offered by the franchisor. The higher the level of support, the less the risk to the funder of the business under-performing.

If the franchisor is willing to enter into a joint venture with you to partially fund the purchase, the bank will consider this positively as it means the franchisor has a vested interest in helping you to succeed.

Government Franchise Funding

All of the government funding agencies offer franchise funding primarily to encourage black entrepreneurs to enter into the franchise business. For example, the National Empowerment Fund considers funding based on a minimum of 50,1% black shareholding, provided that the black shareholders are actively involved in managing the business.

They prefer to fund well-established franchises, fund up to R10 million and expect to exit within seven years, so you’ll need detailed projections to show that the loan can be repaid within that period. Ithala Bank considers funding for KZN-based approved franchisees who do not have collateral.

Related: Should You Purchase An Existing Franchise?

What funders expect from you

Lenders expect you to provide detailed information that will enable them to assess the risks of lending to the franchise. This means they require a detailed business plan, comprehensive and well- substantiated financial projections and full details of the franchise, its agreement terms and the levels of support they will provide. They will also need details of start-up costs; for example, construction, set-up costs, equipment and other resources required to establish the franchise.

Franchise lenders expect you to have concluded discussions with the franchisor and want to know that you have been approved. This pre-approval means that there is less risk to them. You’ll also be expected to provide feasibility studies from the franchisor.

The purchase of a franchise requires an injection of your own cash and if you are borrowing money, you’ll probably need to provide collateral. You’ll need a statement of personal assets and liabilities for each of the directors, a good credit record and detailed CVs of the owners to show the required business experience.

Choose wisely

The more well-known the franchise, the higher the price, so do your homework before applying for finance. Understand the full cost of starting and running the business to make sure you aren’t in for future surprises. In particular, work out your current liquidity status.

Keep a small contingency fund available for unexpected expenses, so don’t invest all available capital in the venture.

Shop around. Compare finance institutions’ offerings to make sure you get the best deal. In the case of less expensive franchises, consider working with a couple of lenders; for example, an asset funder to fund equipment needs and a franchise funder for the start-up and working capital costs.

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Franchisee Advice

Factors To Consider Before Signing Up As A Franchisee

Franchising is a brilliant way to get into business with not many entrepreneurial skills as it comes with a roadmap to follow for success.

Diana Albertyn

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You’ve been considering entrepreneurship for a while, and now that you’ve finally raised some money and been approved for a loan, you’re ready to quit your 9-5 job to run your own business. You may even already have your eye on a particular franchise, but while franchising is considered an easier and more low risk way to get into business, are you suited to being a franchisee?

“The question is not ‘is franchising right for you’, but rather, are you right for franchising? Because if you don’t have the right attitude and skill set, it can be a very expensive mistake,” says small business expert and author Steve Strauss.

Franchising may seem like an easy way into entrepreneurship, but along with an established name and proven systems, come rules, regulations and little room for creativity. If you’re not ready to become a franchisee, but want to go into business for yourself, you may find yourself struggling to operate within the system’s blueprint.

Ask yourself these three questions before proceeding with the process of franchising:

1. Will you be able to follow the directions of the franchisor?

You’re buying into an existing and proven concept so it’s safe to assume that the franchisor knows best, and so you have to be open to learning and following guidelines for business success. If, for example, you have experience in advertising and think you have an improved technique of marketing the franchise, you may want to change the advertising material provided by the franchisor – don’t.

Related: 3 Ways You Can Innovate And Improve As A Franchisee

“Being a franchisee means following the directions of the franchisor, even when you think you know a better way,” advise experts from strategic and tactical advisory firm MSA Worldwide.

“In addition to initial training, you need to be prepared to accept coaching and advice from the franchisor on how you operate or market your location.”

2. Do you have the need to experiment?

Lou Groen may have had success in launching a new menu item that McDonald’s approved of in 1962, but not all franchisees are that lucky. Stick to the plan and limit deviations to the menu or anything that involves the customer experience.

If the franchisor’s concept doesn’t involve deliveries, offering them to your customers may cause issues for others within the franchise system. “If it’s not part of the franchisor’s concept, you’re deviating from the concept and therefore, no longer running your store as a franchise,” according to MSA. Franchising arguably limits innovation opportunities, so if you’re prone to implementing creative ideas and evolving business offerings based on said ideas, rather start your own independent business.

Related: 3 Pricing Tactics To Recession-Proof Your Franchise

3. Are you a team player?

These first two questions you address should already lead to the realisation that everything you do affects everyone in the franchise chain. One bad experience at your establishment and suddenly, all the stores are affected by bad press or unsavoury social media attention.

“Other franchisees are relying upon you to offer to the consumer a consistent level of service, product quality, and brand message. You are going to have to work with others in the system in making decisions,” advise experts.

Remember that as part of a chain of other business owners, you may have to accept that majority rules when it comes to decisions where franchises do have a say.

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Franchisee Advice

3 Ways You Can Innovate And Improve As A Franchisee

Although your role as a franchisee isn’t really to innovate, there’s room for creativity if you go about it the right way.

Diana Albertyn

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When you signed on the dotted line after reading and agreeing with the franchise agreement, you knew that you were buying into a proven system where everything has already been thought out for you, and all you have to do is follow the formula for success.

But you’re a franchisee longing to put your own imprint on your business, and it may be frustrating to feel boxed in by a formula, while you’re bursting with new ideas.

“Franchising, by its nature, discourages innovation on the part of franchisees, who are required by their franchisors to follow very specific policies and procedures on exactly what they will sell, how they will make or deliver it,” notes Randy Myers, contributing editor for CFO and Corporate Board Member magazines.

Related: Types Of Funding Available For Franchisees

This doesn’t mean your ideas will never see the light of day though. But before you approach your franchisor with your brilliant insight, consider the following steps that may well lead you down an innovative path:

1. Get the basics right first

Franchisors know that customers like consistency as it makes them comfortable and trust every location of their franchise they choose to visit. But, even the strictest franchisors get hungry for new ideas. It’s the timing that’s vital for your idea to even be considered.

“Most good systems don’t want new franchisees to even think about innovations until they learn the existing system inside out and prove that they can execute it like a star,” said Jeff Elgin, CEO of FranChoice, a network of franchise referral consultants. “At that point, they have become successful, their base is secure, and they have earned the right to consider innovations.”

It’s wise to ensure you’ve learned your franchisor’s existing business model before you suggest any improvements.

2. Do your homework

So, you’re doing well and you’re sure your idea will be welcomed as a crucial innovation to the franchise system – but research your proposal, suggests Kim Stevens, VP of Regional Development and Director of Franchise Awarding at Woodhouse Day Spas. “Especially if you’re suggesting something that would impact all franchisees, create a business plan before approaching your franchisor,’ she says.

Related: To Buy Into A Franchise Or Purchase A Licence? 3 Factors To Consider

It’s also good to have another look at the franchisor’s policy for accepting new ideas to ensure you’re prepared for tough questions before you propose your idea.

3. Speak to the right people

Elgin recommends you first identify the person at the franchisor’s head office who’s responsible for receiving new ideas. “Many of the ideas a franchisee comes up with will already have been proposed by another franchisee,” notes Elgin.

To avoid wasting your time, no matter how great you think the idea is, present it as early as possible before spending anything developing the idea.

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