Why should you consider buying a franchise restaurant? The benefit of buying one is that you may profit from well-known restaurants just off name recognition. However, purchasing a franchise is like any other investment; there’s no guarantee of success. Here are 5 things to consider as you look into franchise options.
Do your research
Don’t just go with your gut feeling or what you’ve heard. Conduct serious research before investing. You will be required to pay a franchise fee and sign a franchise agreement. Once you do both, you’ve pretty much sealed a deal. How do you ensure that you’re getting the correct information? Ensure that you evaluate not only the potential franchise opportunity but the Franchisor as well.
It’s easy to assume that because the restaurant brand name is well-known or has multiple restaurants, profitability is assured. However, not every franchise guarantees success since many factors, including location, staff, and marketing, create a good franchise. Once you’ve done your research, the results should align with your personal goals and finances.
Get an FDD and review with a qualified professional
When you are buying a franchise restaurant, you should always do it with a qualified professional. A Franchise Disclosure Document (“FDD”) is a legal document mandated by Federal Law covering all-important business and legal issues. This includes information about the Franchisor, information about the Franchised Business, start-up costs, and continuing fees that you will need to pay the Franchisor. This document is one of the most important during this process and is required to seal the deal. Make sure that everything is in writing. Before making any payment, the Franchisor must provide this document 14 days before your execution. Once you receive the document, get an experienced franchise lawyer to review it and give you the green light to sign it.
Get in touch with existing franchisees
It would help if you got in touch with existing franchisees before signing the FDD because these are people who would be honest enough to let you know how the franchise system honestly operates. Ask questions about the profitability, marketing strategies, challenges they have faced, and, most importantly, how much they had to invest. We’re sure you’re wondering where you’ll get the franchisees; luckily for you, the 20th item on the FDD should have a list of all franchisees and their contacts. You should call at least five people to get different opinions.
Remember – you can negotiate
There’s a common misconception that you can’t negotiate when buying a franchise restaurant, but you have a right to intervene. Franchisors have the legal right to modify a contract, especially when a franchisee requests to enhance his/her rights. You should not limit yourself in fear that you’re asking for too much, especially when what you’re asking for is within the Franchisor’s capability.
Below are some things you should consider asking about
- The scope of your protected territory and what the Franchisor can and cannot do in your region;
- Potential grace periods as to the accrual of your royalty obligations‚ including when they begin to accrue;
- Liquidated damages and limiting your liability if you terminate your franchise agreement due to poor performance;
- What right you have to renew your franchise rights;
- Whether you are able to transfer your franchise‚ including to family members for estate planning purposes;
- Your right to cure defaults claimed by the Franchisor; and
- Potential rights of first refusal‚ allowing you to expand into new territories not yet sold by the Franchisor.
If it doesn’t go as planned, be ready to walk away
As much as the whole process may be exciting, especially where you see big profits, getting into the restaurant business can be challenging, especially with all the uncertainties stemming from the COVID-19 pandemic. If the process of buying a franchise restaurant isn’t going well, trust your gut and walk away. There are other opportunities out there.
At Accounovation, we provide restaurants with a complete fractional accounting team for the price of a full-time bookkeeper. Get in touch with us at Accounovation.com for a free consultation on how we can assist you with hiring and accounting services.