Frequently Asked Questions
You can’t start a path on the franchise road without knowing some basic terms like:
- Franchise fee: The amount a potential franchisee pays to have the rights to a franchise location.
- Franchise royalty: A percentage of the monthly revenue a franchisee pays to the franchisor.
- Net-worth: What the franchisee must be worth in order to qualify for a specific franchise
- Liquid Capital: The cash-on-hand a potential franchisee has to have before being considered for a franchise. This will help determine if the candidate can cover all the costs of opening a new franchise location.
- Franchise cost: The entire cost of opening a new franchise, which includes the fee, first royalties, capital, cost of training, marketing, equipment, and more.
The Franchise Disclosure Agreement (FDD) is a document that all franchisors must have and provide to prospective franchisees that want to make an informed decision about their new investment. It’s handed over to the potential franchisees at least 14 days before signing any franchise agreement (which also has to be handed over seven days before signing it). It has to be understandable, written in plain English, and with the terms and rights clearly laid out.
Everything from franchise fees, franchise royalties, to the territory and even financial performance representations (FPR) of current franchise locations must be there.
The FDD also has the phone numbers and contact info for all of the franchisees, so you can call them up and ask them for objective information about the brand.
First and foremost, get legal help and consult. Geta franchise lawyer that will help you go through your local, state and federal regulations in regards to franchises. Like we mentioned before, get every bit of information your can about the franchise’s financial health, performance, locations, goals, support, and even legal history to check for trouble. You need to make sure that you will have the legal support of a franchisor in case any problems with the franchise itself arises.
Go through some these points with your lawyer:
- Long term contracts and how to get out of them in varying cases of emergency.
- Have an exit plan, and the possibility of selling your franchise location at some point, even if you don’t plan on it. You don’t want to get stuck with a franchise you no longer want.
- Make sure you know the territory you’re getting. You don’t want to be promised a very general territory only to find out there’s a clause that permits two or three more franchise locations just on the border of your territory.
- Never stop learning about the changes to your state’s franchise laws and regulations. Always stay on top of everything.