Developing a franchised business is usually a large and complex investment. It can involve a substantial sum of money, often a loan of intimidating dimensions to build out the business and cover myriad expenses, a seriously long and complicated franchise contract and related contracts that will govern the next 10 or 20 years of your business life, and a business planning task that can be formidable. It all starts with the review of a 180-page Franchise Disclosure Document (FDD) that includes contracts, legal case descriptions, bankruptcy history, an estimate of your projected investment, fees to be paid to the franchisor, financial information about the franchisor, and extensive information about the franchise system.
Taking in this much unfamiliar information, and making a well-informed investment decision, is a huge undertaking. It’s a process that calls for professional analysis and thoughtful recommendations so that the eventual franchise relationship is well-informed, well-financed, and healthy. If there are red flags about the program, concerns about the franchisor, questions about the franchise system, provisions in the franchise agreement that are unacceptable, or concerns about your financial capacity to succeed in the franchised business, you will want to discover them at the beginning of the process, before your John or Jane Hancock hits the parchment. Doing so is much easier if you enlist professional help. Here’s a closer look at what type of professional advice you should consider obtaining.
Legal Advice. Contrary to the belief of a cynical few, not all lawyers are the same, so what sort of experience should you look for in your lawyer? You need an attorney who is capable of reviewing your FDD, evaluating and knowledgeably discussing with you the information revealed there, analyzing the franchise agreement to explain the architecture of the franchise relationship to you, and perhaps negotiating on your behalf with the franchisor. Do you need a franchise lawyer? Direct experience representing franchisees is a real plus, but certainly not necessary. Experience helping small businesses may be more important.
When you talk to existing franchisees, ask them what lawyer they use. If you get an enthusiastic response, make a note and follow up. You may find a well-regarded lawyer who has represented other franchisees in this particular system, and has direct experience with legal compliance issues that are particularly important for this franchised business. If you come up dry on recommendations, or if you will be the first franchisee in this system in your state, look through your address book for business owners you know in the town where you are establishing your franchised business, and call them for referrals.
Be prepared to pay fees for the review and evaluation of your FDD and the lawyer’s recommendations regarding the franchise agreement. Many lawyers will conduct a basic FDD review for a set fee; others will charge you an hourly rate. They may ask for some or all of the fee to be paid in advance. Find out what the rate is, and always request an estimate of the total fees to be incurred.
Accounting Advice. Unless you have a lot of professional-level accounting experience (and even then, you may not want to serve as your own accountant), it pays to have a financial expert in your corner, and your needs for professional accounting advice will range far beyond the startup of your business. In the FDD alone you will need to evaluate the financial statements of the franchisor, the financial performance representations included in Item 19, and the estimated total costs and expenses laid out in Item 7. Down the road you will need to produce financial reports, tax returns, and monthly numbers to track your business’s finances.
A good accountant will help you plan the financial needs of your new business, determine the size of the total investment and the amount of money you may need to borrow, explore contingency financial arrangements, and prepare a business plan that can estimate when you should expect the business to break even. This is essential to your continuing business success; do not skip this professional advice.
It is natural for people new to business to want to preserve their cash, and to avoid what will seem like expensive advice and perhaps unnecessary counseling when the franchisor is effectively holding your hand through the development process. Remember this: the responsibility to understand your disclosure document and franchise agreement is yours alone. No franchisor, no matter how solicitous, is acting solely in your best interests. If you sidestep the lawyers and the accountants before signing the franchise agreement, you will need one more piece of professional advice: You should have your head examined.
Andrew Caffey is one of the nation’s leading franchise legal specialists and he represents franchisors across the United States. Caffey served as General Counsel of the International Franchise Association, a member of the Governing Committee of the ABA Forum on Franchising, and Chair of the ABA Forum on Franchising. He also is a member of the bar in Maryland and the District of Columbia, and a member of the Panel of Neutrals of the American Arbitration Association. Caffey has appeared on numerous franchise programs and is a frequent speaker and author on subjects of franchise and business opportunity regulation.