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Injecting Reality into Your Client's Franchise Dreams

Franchising has had long-term success in the U.S. economy, both for franchisors and franchisees. Franchise businesses aren’t just fast food, either. According to a USA Today article, home health care is one of the top franchises in the US. Although most franchise systems—and most franchisees—are reasonably successful, buying a franchise isn’t always the right decision. As an attorney, your job is to insert some practical reality into your client’s franchise dreams.

Here are some practical issues about owning a franchise that you should raise with your client:
 

  • Will your client be happy operating the franchise? Make sure that your client has carefully considered whether he or she will be happy operating the specific business, day in and day out, for a number of years. In many situations, a franchised business may be generating adequate financial returns for the franchisee, but the actual operation of the business (e.g., making submarine sandwiches and supervising young employees) becomes less and less emotionally rewarding as time goes on. This may be especially true for a prospective franchisee who has spent most of his or her career in a nonretail position or with a Fortune 500-type company.
  • Is your client willing to forego freedom? Even if the business is attractive to your client, he or she should think clearly about whether franchising, in general, is right for him or her. Although franchising can have many benefits, it does involve a significant surrender of freedom to the franchisor, and a franchisee must be willing to take direction from the franchisor in a number of areas. There are some businesspeople who may be very effective as independent operators but who would chafe at the restrictions that may be involved in a franchise system; true entrepreneurs are probably not suited to become franchisees.
  • Is your client willing to take the good publicity with the bad? Being part of a franchise often means name recognition and shared goodwill. But there’s a flipside: when any franchisee or the franchisor takes a public position on a political or social issue, the potential backlash can affect your client’s franchise. For example, a Denny’s franchisee’s controversial statements about President Obama’s healthcare law sparked a call for a boycott of all Denny’s, even those owned by franchisees who disagreed with the statement; franchisees are all in the boat together and customers don’t differentiate.
  • Is it financially worthwhile? Although in well-run systems the franchisee can receive significant benefits from the franchisor, the franchisee will have to pay for those benefits, typically through a periodic royalty as well as mandated marketing fund contributions, required periodic upgrades, and adoption of new business methods. Your client needs to consider whether the business will support this financial load, and whether the advantages of being part of a franchised system more than compensates for these expenses.
  • Does your client have a plan? Make sure that your client develops a business plan with conservative financial forecasts, including draft profit and loss, balance sheet, and cash flow forecasts. The client should then have the forecasts reviewed by an accountant operating from the position of a “devil’s advocate.”

With the good counsel you’ll provide, and a focus on the legal and business issues that make franchising unique compared to other business models, your client will be in a far better position to evaluate the benefits and risks associated with the decision to become a franchisee. To help you best advise your clients, CEB’s California Franchise Law and Practice, chap 6, provides a step-by-step guide for counseling clients who are interested in acquiring and operating a franchised business.

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This material is reproduced from Julie Brook’s blog entry, Injecting Reality into Your Client's Franchise Dreams, on the CEB Blog November 26, 2012. Copyright 2012 by the Regents of the University of California. Reproduced with permission of Continuing Education of the Bar - California. For information about CEB publications, telephone toll free 1-800-CEB-3444 or visit our Web site: CEB.com.

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