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Ten Good Reasons Not to Buy a Franchise

NOLO.COM  Related Articles in: Finance > Financial Management

Thinking about buying a franchise? Here are ten reasons why you should consider investing your time and money elsewhere.

  1. Questionable profitability. Most franchisors do not provide much information to potential franchisees regarding earnings possibilities, making it difficult to assess how lucrative investment in the company could be. Even the franchisors who do supply this information usually only give average sales figures and profits before expenses are deducted, numbers that aren't very helpful when trying to determine if your individual franchise will be successful.
  2. High start-up costs. Before opening your franchise, you may be required to pay a non-refundable initial franchise fee, which can cost from several thousand to several hundred thousand dollars. In addition to the initial fee, there are also usually high start-up costs associated with furnishing your franchise with the necessary inventory and equipment. It can easily take several years to recoup the expenses connected with getting your franchise off the ground.
  3. Encroachment. Imagine the following scenario: You have just spent thousands of dollars opening your own GasMart station, when another GasMart station opens across the street, essentially cutting your customer base in half. This type of thing happens to franchisees all the time, as nearly every franchisor reserves the right to operate anywhere they want.
  4. Lack of legal recourse. As a franchisee, there is little legal recourse that you can take if you are wronged by the franchisor. Most franchisors make franchisees sign agreements waiving his or her rights under applicable federal and state law, and some agreements contain provisions allowing the franchisor to choose the venue and the law under which any dispute would be litigated. Shamefully, the Federal Trade Commission (FTC), which is supposed to regulate fairness in franchising, investigates less than 6% of the franchise-related complaints it receives.
  5. Limited independence. When you buy a franchise, you are not just buying the right to use the franchisor's name, but you are buying its business plan as well. As a result, most franchisors impose price, appearance, and design standards on franchisees, limiting the ways you can operate the franchise. While these regulations can help promote uniformity, they can also be stifling to franchisees who feel they could run the business more effectively their own way.
  6. Royalty payments. Franchisees are generally required to make continuing royalty payments to the franchisor each month based on a percentage of his or her franchise's sales, eating into the franchisee's net profits.
  7. Inflated pricing on supplies. In many cases, the franchisor can designate your franchise's supplier of goods and services. Franchisors argue that this is done to maintain quality control, but almost all franchisors receive kickbacks from the vendors. By not allowing you to shop around and subsequently limiting competition, you are forced to pay higher prices on supplies.
  8. Restrictions on post-term competition. Let's say that you decide to purchase a McDonald's, but after a couple of years you determine that you could run a higher-quality, more profitable burger joint on your own. Unfortunately, due to noncompetition clauses built into almost every franchise agreement, franchisees are not allowed to become independent business owners in a similar business after termination of the franchise agreement. By purchasing a franchise, you may be unwittingly limiting your business opportunities for years after the expiration of your contract.
  9. Advertising fees. Many franchisees are obligated to make regular contributions to the franchisor's advertising fund. Franchisors maintain broad discretion over how to administer the advertising fund, and the money you contribute does not necessarily need to be used to target your specific franchise. In a case against Meineke Discount Muffler Shops, for example, it was discovered that Meineke was using the advertising fund for costs wholly separate from advertising, yet the case was ruled in Meineke's favor under a verdict that stated that the franchisor has no fiduciary duty to its franchisees!
  10. Unfair termination. Even the slightest impropriety on your part, such as being late on a royalty payment or violating the franchise's standard operating procedure, can be cause for the franchisor to terminate your agreement. While most franchisors are not this strict, the possibility of losing your entire investment for being late on a payment is a scary thought.
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