September 15, 1997Franchising: Trust everyone, cut the cards
John W. Frees Business First
Before signing on the dotted line, potential franchisees should go over each clause in the contract with an attorney who specializes in franchise law.
Be aware, however, that if the franchiser is a well-established company, such as McDonald's or Pizza Hut, there won't be a lot of room to negotiate contracts, said Brent Rosenthal, a franchise attorney with Buckingham, Doolittle & Burroughs.
"It depends on the maturity of the franchiser itself. Maybe initial franchisees can get better terms than later ones," he said. "To get the first few off the ground, you're naturally going to give franchisees bigger rights."
These could include larger territories, lower royalty payments or other benefits, he said.
On the other hand, "McDonald's may come in and say, `Here it is, take it or leave it,' " he said.
"The evolution is for greater and greater clarity," said Dan Corrigan, president of Charley's Steakery, which has been franchising its restaurant concept since 1991. Now the company is reluctant to sign any agreement that would be "precedent setting."
"Frankly, we do not change our franchise agreements unless we change them for all," he said.
The contracts try to cover all contingencies, but they aren't always successful. Kathy Bobb knows that firsthand. Her franchiser, CompuQuest Educational Services, suddenly decided to give up the business two months ago. The business sends teachers into day care centers and schools with computer equipment to teach children the latest educational software.
"The only reason they gave me is that they were losing money," she said. Fortunately, the company is allowing her and other franchisees to continue to use the name. But without support from headquarters, they have to form a cooperative to complete vital teaching curriculum and offer each other help, Bobb said.
"We didn't want to just shut down," she said. They have contracts signed and 36 computers leased for the year. "We're moving forward as if nothing has changed."
Fortunately, not all franchisees face such startling developments. Attorney Robert Bracco, of Bracco & Associates, said franchise-owned businesses are generally much more stable than other small businesses. While 80 percent of small businesses fail within three years, only 2 percent of franchises do, he said.
There are ways to protect yourself when deciding on a franchise business, Bracco said. The Federal Trade Commission has recognized the dangers inherent in new franchisers and in 1995 required all such businesses to send a Uniform Franchise Offering Circular to all potential franchisees. Like a stock prospectus, the UFOC forces the business to reveal certain information, including any fees, the amount of royalty payments and size of exclusive regions.
Carefully read the sections concerning the financial stability of the franchiser, backgrounds of the executives in charge, and any litigation the company may be involved in, Bracco said. "I would advise any prospective buyer to stay away from them or anyone who has current injunctive or restrictive orders against it," he said.
The UFOC requires franchisers to estimate, as closely as they can, the total upfront cost for buying into a franchise. This allows buyers to determine their ability to finance the business and if they have sufficient working capital to operate it, he said.
"There's a lot of hidden costs in these agreements unless you look at them and examine them, you could end up paying 50 percent of your profits," Bracco said.
Franchisees must have full knowledge of what they are getting into, said Rosenthal. "Franchising is not for the person who is naive in business or for the uninitiated," he said. You need to have a basic understanding of how to run a business as well as a clear understanding of how much support you're going to receive.
Ask for names of other franchisees in the area and talk to them, both attorneys said. Ask them if they received the support promised, or if the products or services were of sufficient quality.
"Are they truly a partner or do they just want your royalty check?" Rosenthal asked.