Once the entrepreneur has decided on franchising, it is both necessary and important to conduct their due diligence. To begin with, the entrepreneur should obtain a Uniform Franchise Offering Circular which will include reports about the franchise’s legal, financial and personnel history. It is also necessary to ensure the franchisee understands the rules and regulations associated with the franchise and the type of help them will receive.
In particular, the franchisee needs to ensure they have the right to use the company name and trademark and conduct business in an area protected from competition from other franchisees. The franchisee should also understand the extent and nature of the management assistance, training and guidance they will receive and if they will be utilizing the expertise of the franchising company related to marketing and advertising. It is also essential for the franchisee to understand the contract between the franchising company and themselves and should carefully negotiate the terms as much as possible, as they are oftentimes favorable to the franchising party and require them to meet sales quotas and purchase equipment, supplies and other items.
When franchising, once the franchise option has been carefully investigated, it is important to understand the franchise package and tax implications. Documents and paperwork the entrepreneur purchasing a franchise should expect to be involved in the process can include a letter of intent; a confidentiality agreement; contracts and leases; a sales agreement; financial statements; tax returns; and a purchase price agreement, as well as other documents. Buying an existing business involves a different set of concerns entrepreneurs purchasing an existing business should be familiar with.
Because of the complexities associated with purchasing a franchise or existing business, the entrepreneur can oftentimes benefit from trained guidance. There are a number of moving parts when franchising and the franchisee should be familiar what they are all and prepared to address them all.
Source: U.S. Small Business Administration, “Buy an existing business or franchise,” Accessed May 1, 2018