franchise validation Archives | Franchise Dictionary Magazine

2 07, 2019

Before you Buy

Audra2019-07-08T13:21:14-04:00July 2nd, 2019|Tags: Discovery Day, franchise attorney, Franchise Disclosure Document, franchise validation, investing in franchise, local market analysis|

Before you Buy

Follow this checklist for due diligence

by Jason Power

You probably research cars before buying one and read a restaurant’s reviews before making a reservation. So it makes sense to do the same research—your due diligence—before investing in a franchise.

The process should include a study of the local market that exists for the franchise’s products and services, conversations with other franchisees, a review of the Franchise Agreement by a lawyer, and participation in the franchisor’s Discovery Day. Follow this checklist to ensure you’re thorough with your due diligence.

1. Research your market.
Does your market need the product or service? Have you called your future competitors to learn about their prices and customer service? Have you tested their products? These actions are crucial. There are dozens, if not hundreds, of stories about a franchisee introducing a product or service that was rejected by people in the territory and the cost to educate them about it was prohibitive.

2. Talk to other franchisees.
Just as you read reviews for a vehicle or look at the menu of a new restaurant, you should learn from those who came before you. When you speak with current franchisees and those who were recently terminated, ask them: Are you profitable? Does the franchisor help with your problems and questions? How do you deal with competitors? If you could go back, would you buy this franchise again? By asking these questions early in the process, you avoid the potential for catastrophe.

3. Have an attorney review the Franchise Agreement.
Having an attorney who is well-versed in franchise law is a must. But you also have to read the Franchise Disclosure Document, Franchise Agreement, and all exhibits, too. If you do not read the documents and then prepare a list of related questions and concerns for the attorney, he or she can’t fully help you understand your rights, roles, and obligations.

4. Attend Discovery Day.
Discovery Day, or “Meet the Team Day” as some franchisors call it, is when a franchisor invites franchisees who are close to signing to visit a corporate location and learn more about the franchise and typical day-to-day operations. This is one of the greatest opportunities to obtain an in-depth understanding of the business and in many cases it is one of the last opportunities to ask the franchisor questions before signing the Franchise Agreement. At Discovery Day, ask questions such as: What is the franchisor’s growth plan for the next one, three, five, and 10 years? What is the franchisor’s marketing strategy for helping franchisees? How are the company’s franchisees performing, especially those in your general area?

Each prospective franchisee’s due diligence checklist will differ slightly, but if you follow the four steps above, you’ll be well on your way to having all the information you need to make an educated decision.

Jason Power

Jason Power exclusively practices franchise law as a partner at Barber Power Law Group in Charlotte, North Carolina. He has assisted hundreds of franchisees with their FDDs and buying into franchises all over the country. Power also represents emerging and established franchisors. To learn more, contact Power at jason@franchise.law or call 980-202-5679. Visit www.barberpowerlaw.com.

2 05, 2019

When a Franchisor Goes Dark…

Audra2019-05-03T14:53:02-04:00May 2nd, 2019|Tags: franchise agreement, franchise attorney, Franchise Disclosure Document, franchise registration renewal, franchise validation, franchisor registration states|

When a Franchisor Goes Dark…

by Jason Power

Certain states require that franchisors register their offerings before they can sell a franchise there. Those same states then require the franchisors to file annual renewals in order to continue selling franchises.

So what happens when you’re prepared to buy a franchise but the franchisor’s state registration hasn’t been renewed yet?

First off, be aware that most franchisors are required to update their franchise disclosure documents in the first few months of each year depending on when their fiscal year ends. This means that these registration states are flooded with documents to review—both renewal applications and new FDDs.

Although the employees in these states work tirelessly to review applications, the process takes time. When franchisors do not file their renewal applications early enough, they may have to stop selling franchises, or “go dark,” until their renewal is approved. (Note that going dark is not a negative reflection on the franchise, but it can delay a sale and frustrate everyone involved.)

What can you do when your franchisor goes dark? Don’t panic. This situation can be a great opportunity for you to reflect on the franchise, call more franchisees for validation, talk in more detail with the franchisor, and work with an accountant or franchise attorney to analyze the opportunity. Sometimes the delay may also present an opportunity to negotiate some terms in the franchise agreement.

What to expect
Also know that this is a process and that many franchisors have this issue each year due to delays in gathering information. You should discuss with the franchisor what, if any, changes are being made to the franchise disclosure document and franchise agreement. A franchisor often will increase fees or change the size of territories during these annual updates. If the expected terms are less favorable than what you’ve already been shown, ask the franchisor to give you the more favorable terms.

Once the state approves the renewal application, the franchisor will be required to send you the new franchise disclosure document and franchise agreement. Usually you will be asked to sign a new FDD receipt and wait for the required disclosure period to lapse before you can sign the new franchise agreement, but some states have exceptions to this requirement. For instance, California and New York will allow franchisors to send a copy of the franchise disclosure document as long as they have filed for renewal, include certain disclaimers, and follow other directions required by the states.

This is in no way a comprehensive explanation of the requirements for all registration states. If you are involved in a pending franchise sale with a franchisor that has gone dark, the best thing you can do is talk with the franchisor about its process during this time period and talk with a franchise attorney who can guide you through the few weeks until the franchisor’s application is renewed.

Jason Power exclusively practices franchise law as a partner at Barber Power Law Group in Charlotte, North Carolina. He has assisted hundreds of franchisees with their FDDs and buying into franchises all over the country. Power also represents emerging and established franchisors. For more information contact Power at jason@franchise.law or call 980-202-5679. Visit www.barberpowerlaw.com.

4 03, 2019

Strategizing Validation

Audra2019-03-12T11:40:50-04:00March 4th, 2019|Tags: Build Rapport, franchise buying process, franchise support and training, franchise validation, questions to ask franchisor|

Strategizing Validation

Get the inside scoop from other franchisees before you make your final decision

by Diana Capirano
Certified Franchise Consultant

My clients hear me say it all the time, “Validation is where the rubber meets the road!” The validation process—when you talk to other franchisees about their real-life experiences inside the franchise—is an important part of the franchise buying process. In fact, the opinions of other franchisees can make or break your decision. This is where you hear how it really is from other franchisees—and when you can determine if similar experiences will work for you. The FTC limits how much the franchisor has to reveal, so you can talk to current owners about any omissions. Inside information from current owners is vital. So how do you make the most of it? Here, we give you five steps to help you make the most of the process.

Step 1-Identify your Targets
Make sure you talk to both top performers and low performers—at least two of each. This gives you a good sampling. Ask about franchise support, training, and the future vision of the franchise.

Include startups, those businesses that have launched within 18 months. This will help you validate start-up costs and track to break even. You’ll even be able to ballpark initial training costs, as it’s still fresh in start-up minds. Also, talk to people at the end of a franchise agreement. Will they renew? What differences have they observed, and how adaptable has the franchisor been to changes in the competitive landscape.
Talk to those closest to you in terms of location and those with similar demographic profiles. It can give a good indication of your target market and may become more relevant in businesses driven by local economies.

Step 2-Develop your Tool
Create a list of questions and include those that the franchisor was not “permitted” to answer. Use a list supplied by your consultant as a guide and add your own questions. Ask clarifying questions as part of a free-flowing conversation, not just a simple Q and A. You want detail. Organize your questions by category, such as financial performance, marketing, support, onboarding, and so on.

Step 3-Build Rapport
Learn about the franchisee and share your background to frame your questions. The higher objective is determining if this is a good fit for everyone. Take a few minutes at the beginning to encourage open-ended, engaged, and candid dialogue. Make it conversational. Focus on the difference between objective and subjective answers. Ask anything and don’t be shy—franchisees went through this same process and know the value. If anything was deemed a negative, ask these questions: Is the franchisor aware? What is the plan to address this? Remember: You are being evaluated as well.

Step 4-Take Notes
Hopefully you will be inundated with great feedback, but document who said what in case you want to circle back for further clarification.

As you organize your information, ask yourself what was most meaningful? Did anything surprise you? What were common themes, both positive and negative. A few other questions to ask yourself:

Can I see myself working with these owners? Will they be a support to me?
What made others successful or unsuccessful? Will the same apply to me?
Overall, do I feel better and encouraged? Or, do I feel leery and concerned?

Step 5-Share Findings
Share your feedback with your consultant and franchisor. Do they seem surprised by anything you’ve uncovered? A great franchisor should not be surprised about anything coming out of validation, but he should be willing to explain or clarify points if necessary.

Jessica Melendez

Diana Capirano, CFC, has an expansive career which includes corporate and franchise sales and development, marketing and operations, merger and acquisitions, structuring and negotiations as well as business ownership. As a highly-respected consultant and mentor, Diana espouses a profound commitment to help prospective business owners and investors understand and navigate the process of deciding on a franchise business. Contact Diana at 941-999-0095, email diana@focusfranchise.com, or visit http://www.focusfranchise.com.