4 Biggest Mistakes that Franchisees Make Before Getting Started
Grounded Before Liftoff
At Shelton Law and Associates we are commonly asked about what causes franchisees to ground themselves before they even had a chance to liftoff. Below are the 4 biggest mistakes that franchisees make before getting started, however, they all revolve around time. It is important to remember to not rush and to take the time to ensure that you are making a solid business decision.
1. Not reading and understanding all of the documents.
Many franchisees do not read all of the documents that govern their relationship with the franchisor. It is imperative that you read all of the documents. These documents hold the very terms that will be enforced upon you and your franchise. While it may be true that the Franchise Disclosure Document (FDD) consists of the same 23 areas of disclosure for every franchisor, what is contained within those 23 areas varies widely. The Franchise Disclosure Document is comprised of 2 main parts, the a) “plain English” required part; and b) the legal documents. The plain English part is the first section of the document which will be labeled as Items 1-23. Unfortunately, Item 22 requires lists and copies of all agreements the franchisee might possibly sign to begin the franchise relationship as well as any agreements the franchisee might sign at some point during the franchise relationship, which is what creates the second part – the legal documents.
It is important that after you have read the FDD and Franchise Agreements that you have an experienced franchise attorney evaluate them as well. Remember you will be establishing a long term relationship with your franchisor, usually around 10 years or more, so get to know every detail of the requirements and how the franchisor might fine or terminate you. It is better to know this info before you sign on the dotted line.
2. Not asking for better terms.
The one misconception that we hear over and over from franchisees is that the Franchise Agreement is non-negotiable. That simply is not true. Every contract is negotiable however, all franchise salespersons and franchise brokers will stress this sentence to every franchisee prospect. Some terms of course cannot be changed but a lot of them can. If it makes sense to help the franchisee grow and does not harm the franchise system, most business savvy franchisors are willing to listen to legal logic. An experienced franchise attorney can help you negotiate the terms of the Franchise Agreement to reach the best possible outcome for your business.
3. Not obtaining all promises in writing.
If the salesperson or the franchise broker tells you something that is not contained in the franchisor’s documents then you must get it in writing. Franchisors are regulated by state and federal statutes. Make sure that what is promised to you is in an addendum to your Franchise Agreement. Without the addendum, it may be difficult or virtually impossible for you to enforce that promise. If the franchisor will not put their promise in writing, and what you were told was material or important, you should speak with a qualified franchise attorney about reporting the franchisor to the Attorney General in the state where you are located. And by all means, do not do business with that franchisor. Pass and say “Next”. There is no franchisor that is the only one in an industry, they all have competitors.
4. Failing to use due diligence.
As a prospective franchisee, your due diligence is calling existing franchisees to learn about your potential investment. Speak with as many as possible, not just one. Be sure to choose different franchisees from various areas and not just from the top of the list. Franchise Attorneys have been known to put the best, most successful franchisees at the top of the list, betting that potential franchisees will only call a couple. And do not waste time calling those listed around your area. They will commonly give less than stellar reviews if they are operating from a mentality of scarcity as opposed to an abundance. Some just do not think they can handle the competitor or are greedy for all the leads. When speaking with the existing or former franchisees, ask the hard questions, not just if they are happy that they bought into the franchise.
For a list of potential questions, visit our website at www.Sheltonpower.com
By: Lynne Shelton, Esq. CFE
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