Whether you are considering buying or selling a franchise, it’s important to have an experienced franchisee attorney walk you through the process.
The Steps to Buying a Franchise
Selecting the right franchise opportunity that fits your skill set, budget and lifestyle is crucial. Here are some tips that many of our clients have found beneficial in their evaluation:
- Evaluate Potential Opportunities: Your goal here is to match your unique capabilities, skills and resources with two to four franchise opportunities that you can see yourself owning and operating.
- Call Existing & Former Franchisees: The most important step in researching a brand is talking with existing and former franchisees (and not just the ones suggested by the franchisor). Find them, talk to them and learn about how the system and support structure really works.
- Draft Business Plan/Projections: As you start to narrow your search, begin to fill in the blanks of your projected revenue and cash flow. What should the numbers look like in 6 months, 1 year and 3 years after you open?
- Legal Review of the FDD & Franchise Agreement: Be sure you understand the franchisor’s operating history, the makeup and experience of its executive team, the fees and royalties that you will pay as a franchisee and what liabilities you face if you default under the Franchise Agreement. Remember that you should not sign a franchise agreement without having it reviewed by an experienced franchise attorney. Learn more about our FDD review services.
- Attend Discovery Day: Meeting the management team and having an opportunity to gain greater knowledge about how to run a franchise is a key step in your due diligence process as you move closer to making your final selection.
- Make Financing Arrangements: Before you sign a franchise agreement, you need to confirm your business plan and financial projections, and then determine your source of funds. There are several financing options available to fund the start-up costs involved in opening up a franchise. Some of those options include SBA financing, bank financing (other than SBA), private lenders, and 401K rollover. Regardless of the source of funds, understanding the financials of the business is absolutely paramount.
- Finalize Entity Selection and Ownership Percentages: Enlist the guidance of a CPA and business attorney to discuss whether an LLC, corporation or some other business entity makes the most sense to own your franchise. If you will have partners, then a shareholders’ agreement, operating agreement or similar document will be necessary to articulate everyone’s rights, obligations and commitments in the ownership and operation of the franchise.
- Sign the Franchise Agreement and Pay the Franchise Fee: Once you have met with the franchisor, spoken to other franchisees, developed your business plan, confirmed your financials, consulted with legal and tax professionals, and completed all of your due diligence, it is time to think about taking the big leap. Every new venture has risk and uncertainty, but eventually, it comes time to put pen to paper and sign on the dotted line if you want to see the upside of being in business for yourself.
Selling a Franchise
If you have made the decision to exit your franchise, there are three critical tasks to complete before listing your business for sale on the market.
- Discuss Future Plans with the Franchisor: First, you should start a dialogue with your franchisor about your desire to exit the business. All franchisor-franchisee relationships eventually come to an end. You have utilized the franchise system, brand, and support to build your business. Don’t be afraid to employ these resources in order to facilitate your exit. The franchisor is highly motivated to ensure that there is a successful transition to a new owner. If you have specific concerns about discussing your exit with the franchisor, then always consult your franchise attorney in advance.
- Gather Documentation: Second, make sure that all of your business documentation is accurate, complete and easily accessible; most buyers will want to review bank statements, tax returns, profit-and-loss statements, balance sheets, vendor contracts, employee information, and leases, among other documents. Business records that are missing, incomplete or in disarray signal to any potential buyer that you are disorganized and, therefore, raises the concern that the business may be in trouble. Ultimately, this may affect the value of any offer and cause delays in getting a deal completed. Presenting a complete and accurate picture of the Business to a Buyer, and demonstrating that you are organized, will create trust and project to the Buyer that you are serious about the transaction.
- Understand Financing Options: Before listing your business for sale, solicit recommendations from your business broker, attorney, accountant or franchisor about the value of the business and the types of financing sources available to a potential Buyer; in essence, you are trying to pre-qualify your business so that a Buyer has confidence that a deal can get done. This will help expedite the process of solidifying a value that will be supported by the financials and ultimately approved by a lender.
Work With Experienced Franchise Lawyers
JM LAW GROUP has had the privilege of guiding hundreds of buyers and sellers of a broad range of franchises over the years. We welcome the opportunity to provide our expertise in your next transaction. If you are contemplating the sale of your franchise, or are buying an existing franchise, contact us today to discuss our efficient process and billing structure.