How to Avoid the Common Pitfalls Associated with Franchising

Although franchising is always evergreen and lucrative, not all franchise opportunities are perfect for all/any investor. That said, prospective buyers must do due diligence and discover the risks associated with the franchise that they’re interested in.

The first step is to contact a franchise law attorney if you’re considering franchising. The next thing is to determine the success rate and this will be significantly influenced by the common pitfalls associated with franchising. In this article, we discuss the mistakes done by franchise startups and how to avoid them.

5 Ways to Avoid Failure in franchising

The following are some of the tactics to help new franchisees avoid failure in franchising.

1. Aligning the Trade Mark with the Franchise Strategy

Trademarks are key intellectual properties that are very valuable to a franchise. Consequently, having a registered trademark must be prioritized. The trademark registration should cover the products and services of the franchised business.

Trade mark protection should also be addressed, particularly in regards to international expansion. Why? To allow the franchisor to expand in key strategic markets when they’re ready.

2. Verify Copyright Ownership

Besides trademarks, franchises have other intellectual properties, including copyrights, design rights, patents, and database rights. Since intellectual properties are crucial to any business, most likely the franchisor will have taken licenses from third parties.

With that in mind, the franchisor should identify the businesses’ intellectual properties and determines whether they own them. Copyrights should be in writing when being assigned or subleased according to franchising law. Otherwise, ownership vests or remains with the author.

3. Walk before trying to Run

Establishing a successful franchise requires many skill sets, which may vary by franchise. That said, franchisors should “road test” their franchise models before rolling them out. Testing the business model allows the franchisor to detect any potential challenges and adjust accordingly to enhance the viability of their concepts for both the franchisor and prospective buyers.

Failing to test your concept sets the franchised business for failure. However, franchisors must remember that the pilot phase should always be appropriately regulated by a contract. Why? The pilot phase involves revealing confidential information crucial to the business, meaning the franchisor can be disadvantaged if the franchisee decides to abuse their position.

4. Know the Franchisee

It’s important to know the identity of your prospective franchisee, their goals and missions, and whether both of you (franchisor and franchisee) are compatible. before signing a franchise agreement. Although this conversation will feel awkward, the sooner it happens, the better.

Prior knowledge can help the franchisor when drafting the terms of the contract. At this stage, the franchisor should seek to discover the following:

·         Whether the prospective buyer has competing business interests;

·         Whether the prospective buyer is affiliated with third-party operators who might provide unnecessary competition;

·         Does the investor have sufficient capital?

5. Make sure the Prospective Franchisee Knows You

In most jurisdictions, it is a legal requirement for franchisors to issue prospective buyers with a franchise disclosure document, or make “adequate disclosure,” about the franchise before signing the franchise agreement.

Even if this is not a legal requirement in your state/jurisdiction, both franchisor and franchisee should at least ensure they know each other for future protection. Misrepresentation of the franchise disclosure document can attract legal action and that’s why the pre-contractual disclosure process is crucial as it helps detect misrepresentation hence, limiting exposure. This process (disclosure) also has the following advantages:

• Ensures franchisors do not oversell/overquote the franchise;
• Ensure franchisors are realistic;
• Helps prospective buyers manage expectations; and
• Provides an honest review of the business and reliable financials. 

5. Have an Exit Strategy

Franchisors must have an exit strategy if things don’t work out. A smooth exit strategy does not disrupt operations that maximize the value of the business. That said, the franchise agreement should facilitate a smooth exit without interfering with the performance of the business. 

How Can an Attorney Help

It doesn’t matter whether the franchise agreement is negotiable or ‘non-negotiable.’ What matters is whether you understand the terms of the contract. Of course, you can’t fully understand a franchise agreement if you’re not a legal professional–that’s where a franchise lawyer comes in.

Unlike you, a franchise attorney will detect any red flags and advice you on whether you’re getting a good or raw deal. The bottom line is to understand how a franchise lawyer can protect your interests. So, how can a lawyer help you?

•  A franchise lawyer can interpret Franchise Disclosure Documents and Franchise Agreements.
• A franchise lawyer will help you determine if the opportunity is viable;
•  A franchise lawyer can offer legal representation if things go south.

With the right approach, franchising can be lucrative. However, understanding the common pitfalls associated with franchising can mean the difference between success and failure.