Want to Buy a Franchise? Ten Reasons Not to Do It
Thinking about buying a franchise? Here are ten reasons why you should consider investing your time and money elsewhere.
1. Questionable profitability. Most franchise owners don't provide much information to potential buyers regarding earnings possibilities. Even the franchisors who do supply this information usually give only average sales figures and profits before expenses are deducted, numbers that aren't very helpful when trying to determine whether your individual franchise will be successful.
2. High start-up costs. Before opening your franchise, you may be required to pay a non-refundable initial franchise fee, anywhere from several thousand to several hundred thousand dollars. In addition you'll have to pay a lot to furnish your franchise with the necessary inventory and equipment. It can easily take several years to recoup all these expenses.
3. encroachment. Imagine that you've just spent thousands of dollars opening your own GasMart station, when another GasMart station opens across the street. There goes half your customer base. This type of thing happens to franchisees all the time, as nearly every franchisor reserves the right to operate anywhere they want.
4. Lack of legal recourse. As a franchisee, you have little legal recourse if you're wronged by the franchisor. Most franchisors make franchisees sign agreements waiving their rights under federal and state law, and in some cases allowing the franchisor to choose where and under what law any dispute would be litigated. Shamefully, the Federal Trade Commission (FTC) investigates only a small minority of the franchise-related complaints it receives.
5. Limited independence. When you buy a franchise, you're not just buying the right to use the franchisor's name, you're buying its business plan as well. Most franchisors impose price, appearance, and design standards, limiting the ways you can operate the franchise. While these standards can help promote uniformity, they can also stifle your creativity and ability to cater to local tastes or needs.
6. Royalty payments. Most franchisees must make royalty payments to the franchisor each month based on a percentage of sales, eating into the franchisee's net profits.
7. Inflated pricing on supplies. In many cases, the franchisor can designate your franchise's supplier of goods and services. They argue that this is to maintain quality control, but almost all franchisors receive kickbacks from the vendors. By not allowing you to shop around, you're forced to pay higher prices on supplies.
8. Restrictions on post-term competition. Let's say that you decide to purchase a hamburger franchise, but after a couple of years you determine that you could run a higher-quality, more profitable burger joint on your own. Unfortunately, due to noncompetition clauses built into almost every franchise agreement, franchisees are not allowed to become independent business owners in a similar business after termination of the franchise agreement. By purchasing a franchise, you may be unwittingly limiting your business opportunities for years after the expiration of your contract.
9. Advertising fees. Many franchisees are obligated to make regular contributions to the franchisor's advertising fund. But will they use the money to advertise your franchise? Quite possibly not! Franchisors maintain broad discretion over how to administer the advertising fund. In a case against Meineke Discount Muffler Shops, for example, it was discovered that Meineke was using the advertising fund for costs wholly separate from advertising, yet the court ruled in Meineke's favor, saying that the franchisor has no fiduciary duty to its franchisees.
10. Unfair termination. Even the slightest impropriety on your part, such as being late on a royalty payment or violating the franchise's standard operating procedure, can be cause for the franchisor to terminate your agreement. While most franchisors are not this strict, the possibility of losing your entire investment for being late on a payment is downright scary.
For detailed information on all aspects of franchises, see Legal Guide for Starting & Running a Small Business, by Fred S. Steingold (Nolo).