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AGENDA
ISSUE
“Due to the down economy and lack of available funding, franchising is a buyer’s market.”
partner and I got started, it was definitely overwhelming,” says Rooney, who was only 22 at the time. “We had to overcome obsta- cles that most young adults our age don’t have, but we learned. The franchise’s CEO and COO helped us in areas like business development, general business support, and customer presentations.”
Rooney describes his upfront costs as reasonable, but daunting for someone his age who’d never owned a business. “I had to buy a lot of equipment, carry the proper insurance, and hire and train staff.” He says he spent between $35,000 and $45,000. “But I knew if I ran a quality business and com- mitted my time and energy to its growth, I could make it back, in no time.”
Rooney also mentions that due diligence was a big part of his success. Though eager to obtain a franchise, “I had a lawyer look over the FDD,” Rooney says, referring to the franchise disclosure document that franchi- sors are required by law to provide potential franchisees prior to starting up. “If properly prepared by the franchisor, the FDD should contain extensive information about exist- ing franchisees—including their names, addresses, and contact information—and the number of franchise outlets that were closed, sold, or terminated in the last fiscal year,” says Charles Internicola, a New York City- based business and franchise lawyer.
Internicola has a few pointers for those who want to end up more like Rooney and less like Fox. Prospective franchisees, he says, should begin by researching franchises or working with a franchise broker and look- ing for a company that fits with their avail- able investment capital, business skills, and interests. Once they’ve identified a strong candidate, those looking to own a franchise should visit the franchisor’s headquarters, where they can meet the franchisor’s staff on what many franchisors call “discovery day.” Afterwards, prospective franchisees usually have a good idea about whether they wish to proceed, but they shouldn’t just leap blindly. “At that point, they need to do their due dili- gence and review the FDD with their legal representative before signing a franchise agreement,” he says.
Even after all that, if a franchisor thinks the franchise looks promising but the specif- ics of the paperwork might put him or her at a disadvantage, Kelly suggests it may well
be worth haggling over the details. “Due
to the down economy and lack of available funding, franchising is a buyer’s market” he says. “Franchisors are much more open to negotiating the terms of their franchise agree- ments. While no franchisor wants to negoti- ate, few are in a position to refuse a qualified prospect based on reasonable requests. And
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“Then, I spent another twenty or twenty- five thousand dollars on product and five or ten thousand dollars on miscellaneous expenses.” In all, he spent around $60,000.
Although “extremely satisfied” with
his current franchisor, residential Realtor Jonathan Lerner, broker for Real Living
Five Corners in Scarsdale, also says his first franchisor relationship, with another resi- dential real estate group, was problematic. Lerner and other former franchise owners are plaintiffs in a litigation suit against the franchisor, alleging fraud and various vio- lations. “We did everything right as a real estate office, but the franchise didn’t give us what they promised—just excuses—so we terminated the contract.”
How could things go so wrong? Mario Herman, a Washington, DC, franchise law- yer, says that, although most franchisors grasp the ramifications of failing to comply with laws regarding financial disclosure, “unscrupulous franchisors will always evade the law and defraud, regardless of the potential consequences. Self-policing only goes so far in the franchise industry.” And, says Fox, because the income of fran- chise isn’t audited, franchisors can’t present anticipated earnings, which can lead to murky projections.
Even when franchisors are on the
level, franchisees can be their own worst enemies. David Kaufmann, founding mem- ber and senior partner of New York City’s Kaufmann Gildin Robbins & Oppenheim LLC and a writer of New York’s Franchise Disclosure Law, says, “You’d be shocked
at how many prospective franchisees don’t read the [financial-disclosure document], cover to cover. That’s a fatal error. That document’s designed to provide all mate- rial information—good and bad —that any prospective franchisee should know. If you don’t read it, don’t claim ignorance as a defense later.”
In addition, even if a franchisor is finan- cially upfront and a franchisee is savvy, things can still head south. Sometimes franchisors fail to provide support for their franchisees, especially when it comes to locations, says Kelly. The reason is that franchisees generally want to limit competi- tion between franchisees of the same firm, while franchisors want to achieve market saturation. Fox says that “Sandler claims
to protect territories by population, but,
in Westchester, there have been three fran- chises at one time and [the company’s] not
concerned whether you’re a mile or twenty miles apart. In major cities, you not only compete against other training companies, but regularly find yourself competing against another Sandler franchisee.”
Encroachment, Kelly says, "is one of
the most contentious issues in franchis- ing. “Most franchisors want to maximize revenue and lock out the competition. They might require a franchisee to open multiple units within a relatively close proximity,
or allow other franchisees to open com- peting locations within their trade area. Prospective franchisees should insist on well-defined, protected territories for each of their locations, and resist development deals that force them to ‘cannibalize’ the sales at their existing locations.”
Yet some say the prevalence of the self- cannibalizing franchisor phenomenon is over-stated. “A good franchisor will not put units too close, where it begins to impact the individual shop,” says Lerner, who says that adding franchises can be part of a “brand- awareness” strategy that ultimately benefits all the franchisees. Even Kelly says that loca- tions, while potentially contentious at some times, are mostly an easier part of the process.
“Most franchisors provide site-selection criteria,” he says, “including type of loca- tions, traffic and demographics, and pricing guidelines that the franchisee and his com- mercial real estate broker can use to find a suitable site. The franchisee then submits the chosen location—or locations—to the franchisor for approval. Good franchisors are very engaged in this process, helping the franchisee find an optimal location at a favorable rent. Some franchisors, like those with mall-based concepts, actually find the locations and negotiate the terms on behalf of their franchisees.”
And there are many franchisors ready
to praise their franchisees and their arrange- ments. Fewer than 10 percent of franchise agreements are either terminated or trans- ferred annually, IFA spokesperson Matt Haller says. Kaufmann adds that “buying a franchise is complicated, but franchising’s enormously profitable for both franchisor and franchisee.”
In contrast to Fox, who cites lack of proper support from his franchisor as a rea- son for his franchise’s failure, Kevin Rooney, co-owner of TGA – Premier Junior Golf
and Premier Youth Tennis of Westchester County, says his franchisor was pivotal as he prepared to open in 2008. “When my
Q1 2013