Buying a franchise is a lengthy process. Here are some ways for the buyer to prepare themselves before finding the right franchise.
Litigation History
The first thing to know before purchasing a franchise is the history of litigation within the franchise. Have your team prepare for the legal issues, risks and financial situation at hand. A franchisee may feel obligated to track the legal history of a franchise before they think about joining. Conducting the proper research of the litigation history may save you from disastrous results from buying into the wrong franchise.
Renewal Rights
It’s not guaranteed that a franchisee is offered friendly renewal terms. Preferably when franchise buyers are looking to buy a unit, the length of the renewal period should be perpetual. Otherwise, that can affect the possibility of the unit selling if the franchisee wanted to sell the unit down the line. It’s important to consider the renewals you’re entitled to is a very important contract term.
Restricted Covenants
There are lots of things a franchisee can and cannot do during and after franchise ownership. The important covenants are usually after the ownership. Research the details & restrictions of post-franchise ownership. Some franchises may move to terminate ownership due to the franchisees’ lack of involvement in daily operations.
Company Right To Acquire Units
Many franchise agreements state that at the end of a franchise agreement, the franchisor has the right to acquire the assets. There’s nothing wrong with selling the franchise back to the franchisor, as long as the price is up to the seller’s expectations. The only issue is if the franchisor is planning to use a “depreciated value” formula to buy the franchise back. This proposed depreciated price is calculated by reducing the value of the unit based on the amount of years the franchisee has had it for. By the time the franchisee wants to sell the unit, it may not be worth as much.
Franchise Disclosure Agreement
The franchise disclosure agreement is a legal document provided to the franchisee outlining the franchise system, information about the Franchise For Sale, and any agreements that will need to be signed. Furthermore, the franchise disclosure agreement shows the number of units closed in the past three years. This is important for the franchisee when they have to make an informed decision regarding the purchase of that franchise.
Reaching Out To Current Franchisees
Potential buyers should reach out to current franchisees of the brand to better understand the brand and the franchising process firsthand. Doing this would give a potential buyer deeper insight into the inner workings of a brand and better understand the investment process.
How To Buy A Franchise
Business Exchange has been working with brokers for the last 25 years to help list franchises on our website. There are many franchises and 47 different industries to choose from. If there are any questions or concerns regarding the franchises, please call 1-877-337-1188.
