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What do you actually get from spending money to buy 7.  Check the history and experience of the franchisor’s the franchise—name recognition, intellectual property, officers and managers. marketing support, lead generation? Is the concept of the 8. Research, research, research. The more you know, the The Do’s and Don’ts of franchise mature enough, so you don’t have to constantly better your decision is likely to be. Only you can determine innovate the product or service on your own? if owning a particular franchise is right for you. Most likely, your decision will be based on two factors: your investment 6. Are you a good fit? and risk capabilities. Buying a Franchise Know your strengths and weaknesses. A franchisee is 9. Decide whether you want to be in business full time. often restricted by what’s there in the franchise agreement. Or would you prefer to be in it part time, or perhaps with Due diligence is important when buying any business. If you take up a concept in which you have no interest just your family? A franchise is certainly no different. because it is profitable, it may soon turn into a burden for 10. Look to the seller as the best source of financing when you—you just might lose all your interest! purchasing a business. By Rajiv Singh 11. Consider the economics of the business more than how 7. Do you know the market? well or poorly it has been run. ne of the first things to consider before buying a Knowing the present market trends is very important for 12. Verify receivables (through written verification) from franchise is what you are passionate about. That finding success as a franchisee. Most franchise agreements people who owe the business money. accomplishes two things: it drives the business, are for 10 years, so you must choose franchise opportuni- 13. Deal only with established franchisors who are well- and the love for what one is doing drives the ties that belong to categories that have a promising future. financed and widely successful. Oowner. When the business and the owner are operating as It’s always better to go for products / services that will be 15. Plan for more expenses and slower profitability than one, it is a powerful combination. needed in every kind of market. you think you need. The next step is to meet with more than one of the franchi- sees currently operating in the franchise. Look at the location Do’s and Don’ts DON’TS and determine if you like its look and feel. Ask the franchisee 1. Don’t permit any expert to decide for you whether or not if their startup and ongoing training has been sufficient, DO: you should buy a business. whether the franchisor aides in advertising and marketing 1. Investigate franchise opportunities. Be careful: there are 2. Don’t buy a business or franchise without your lawyer efforts, and how much freedom the franchisee has in select- thousands of franchise offerings, and not all of them are approving all documents. ing advertising, the product line, etc. Also ask how many good opportunities. If possible, work for someone else in 3. Don’t buy a business or franchise without your accoun- hours the franchisee spends on their business. Confirm with the business first. tant reviewing the franchisor’s records. them what their startup costs were, and how long it took to 2. Talk to the present owners of the franchise. Ask them 4. Don’t rely on information or advice from the franchisor see returns on their investment. how pleased they are with their decision, how good their or other selling agents. Another important requirement is to carry out a good business is doing, and whether they met their projections. 5. Don’t rely on pro-forma financial statements (future amount of research before you start up your business. Make Inquire if the franchisor is responsive to their needs and predictions). sure you research the following: Opting for an emerging franchise business for sale is also whether the training was adequate. 6. Don’t be in a rush. Wait patiently for the big opportunity • The market good, provided you have done sufficient research on the busi- 3. Consult any and all the advi- by looking at lots of them. • The system ness and the sector it is in. sors you feel can help you. 7. Don’t rely on the seller’s evaluation • The company This includes having your accountant of inventory and other assets. • The competition 2. What is the brand recall / equity of the franchise? and lawyer review the audited finan- 8. Don’t deal with startups or poorly • The franchisees Franchises work well when there is brand recall / equity of cial statements and legal documents. “A franchisee is financed / inexperienced franchisors. the franchise. Everyone knows about Subway, McDonald’s, etc. 4. No question is too trivial. Confirm often restricted 9. Don’t hesitate to walk away from a What to look for? If a franchise has little or no name recognition, launching it and challenge the information that is by what’s there deal that isn’t a potential home run. If you are thinking about investing in a franchise and will almost be identical to launching a brand new business. provided to you. in the franchise 10. Don’t overlook comparing what you want to know if the brand you are looking at has a trademark 5. Compare other franchise systems can do as an individual verses as worth paying for, then look at their marketing and growth. 3. What is the success rate of the franchisees? in the same field. Look for franchises agreement.” a franchisee. Has its recent marketing been effective or ineffective? Is Many franchisors have ways to make the success rates of that are solidly managed, well financed, 11. Don’t hurry. Cutting corners on your the brand growing or has it reached a plateau? Is it franchisees look better than they actually are. and are positioned in a growth indus- research can increase your likelihood consistently coming out with new products and / or ser- try. Investigate any regional franchises of failure. vices? Researching your potential brand’s history can give 4. What will it do to help you market your business? that are doing well but have not yet gone national in their 12. Don’t overextend yourself or be overly optimistic about you an idea of where it is are most likely heading. Ask what the brand is going to do to promote the name distribution. your personal finances. Be realistic, and if anything, of the franchise in your area or target market. If you are 6. Evaluate yourself. See if franchising is really for you. be conservative. Key questions to ask before buying a franchise paying marketing fees as part of ongoing payments, how Appraise your experience, skills and likes to determine 1. Do you know the franchisor? will this fees benefit you? if the business you are considering is a good fit. Evaluate Rajiv Singh is the President & CEO of Team India Managers Limited. He Carry out all kinds of background research on the yourself in comparison to other franchisees that you meet is also the Honorary Vice President of the Franchising Association of India franchisor. Going for established brands is always good. 5. What exactly are you buying? and talk to. (Member–National Executive Council).

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• Additional training—always a good value Areas of protection. Most franchisors are loathe • Options on additional units—expansion possibilities to grant areas of protection with their franchises, because • Travel expenses—every bit helps they don’t want to limit the geographical area in which they Negotiating • Existing units—only the franchisor may know that they can advance with new projects. When areas of protection are are available granted, they are done on a case-by-case basis and usually • Start-up costs—the franchisor can help with marketing cover a modest geographical area. and financing Royalty reductions. Franchisors are reluctant to reduce their royalties in their franchise agreement in with a franchisor Even before you arrive at the point of negotiations, order to maintain consistency and fairness within their You don’t have to accept all the franchisor’s terms— there is a process you need to follow: franchisee community. Franchisors do consider, in special not without putting up a fight! 1. Engage an experienced franchise attorney to review circumstances, royalty reductions, especially when they are the agreement. dealing with multiple franchises, or when a franchisee is By Rajiv Singh 2. Confirm that the franchisor will negotiate the terms of significantly impacted by a development by its franchisor in the agreement. its market area. 3. Recognize that certain terms are non-negotiable. Liquidated damages. Franchisors are reluctant 4. Focus on the important points in the agreement. to reduce their liquidated damages. The franchisor orienta- tion is that the franchise agreement is for a specified term. Examples of provisions in the agreement that you If the franchise term is terminated prior to its normal should definitely negotiate: completion date, the franchisor has lost its presence in the A. Restrictions on products and services that you wish to sell marketplace and is entitled to receive liquidated damages to B. Marketing or selling in “open” territories replace its lost income stream. C. Indemnification provisions Transfer of franchise. Franchisors will D. Advertising insist on approval rights upon the transfer of a franchise E. The Transfer and Assignment Section by a franchisee, or will prohibit the transfer of a F. The minimum guarantee of return on investment or actual franchise and will require a new franchise agreement. costs until the business actually starts earning returns Franchisors reserve absolute discretion in transferring or selling their hotel franchise systems; this is done so that Tips for negotiating franchise agreements: they can sell their system without being handicapped by • Ensure that the franchise agreement complies with the law their franchisees. of the land. Upgrading. While franchisors will discuss the • Ensure that the franchise agreement does not contain ele- particulars of a product improvement plan in order to hether or not you can negotiate the terms and that you should accept every clause in the agreement at ments that may constitute unconscionable conduct. maintain product quality, they exercise their best efforts conditions of your franchise agreement depends face value. Good franchisors appreciate it if you ask probing • Outline for the franchisor (in writing) a list of objections to to ensure that plans are consistent with their stan- solely on the franchisor. When it comes to questions. If a clause in the agreement bothers you, ask for the franchise agreement and the changes that you seek. dards manual and are consistent with the integrity of making changes to their franchise agreement, an explanation, then talk it over with your attorney. Should • Make a note of all correspondence and their brands. Wcertain franchisors will negotiate the terms of their franchise it remain a sticking point, you always have the option of communication with the franchisor. Renewal. Franchisors normally agreement, while others will not. In some cases, the distinc- walking away from the deal. It is much better to do so at this “It is important do not provide renewal rights due to tion is based upon the size and maturity of the franchisor. For stage than to sign on the dotted line and regret it for a very If you come across a franchisor who is changing market conditions and new example, McDonald’s wouldn’t negotiate their agreement, but long time to come. reluctant to pass along a list of current to remember that business strategies. When they do allow a new franchisor may be far more willing to agree to changes Settling on a price is only the first step in negotiating franchisees, makes promises of earning a franchisee can for renewal rights, franchisors will con- in order to sell a franchise. the sale. Actually, the structure of the deal is often more a fortune on a limited amount of money never succeed in sistently provide that they have broad—if important than the actual price. Be prepared to pay between invested, insists on deposits for holding isolation. It’s a not absolute—discretion in approving Successful brands may not negotiate because: 30 and 50 percent of the price in cash, and finance the a franchise unit, tries to convince you to team effort.” a renewal. • They have a history of successful and happy franchisees remaining amount. sign before someone else does, or is full of Litigation. Franchisors are careful • They know there are plenty of potential franchisees who empty advice when answering your ques- to provide rights to litigate in the state would like to buy into their system If the franchisor establishes that you are qualified tions, warning bells should ring! The fact where their principal office is located. and serious, some franchise cost items can be is that responsible franchisors don’t act in this way. Oftentimes, franchise agreements provide for mediation For an entrepreneur to get into negotiations with the fran- open for negotiation: Like any good relationship, the one between a franchisor and arbitration clauses as a more effective way of resolving chisor, the later will first want to be sure that you fit in with the • The franchise fee—especially if you buy more than and franchisee is based on respect and mutual benefit. Do disputes expeditiously. team—the people in the franchisee support infrastructure, one unit your due diligence and respect the process. the network’s suppliers, and other franchisees. • Protected territory—it is feasible to negotiate a larger one Rajiv Singh is the President & CEO of Team India Managers Limited. He It is important to remember that a franchisee can never • Royalty payments—if not the amount, then the timing During negotiations, franchisors need to consider is also the Honorary Vice President of the Franchising Association of India succeed in isolation. It’s a team effort. This does not mean • Marketing fund payments—control how the money is spent the impact of negotiations on their overall system: (Member–National Executive Council).

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