- Sentinel Law
Frustrations To The Road Of Franchisee
Updated: Jan 12, 2020
ISSUES TO CONSIDER WHEN ACQUIRING FRANCHISES
Florida franchise are regulated by the Department of Agriculture & Consumer Services, under the Fla. Stat §559.803, requiring a disclosure statements of the Florida’s Business Opportunity Act. The statute provides a business opportunity law that applies to the sale of franchises, and requires franchisors to file an annual Franchise Exemption Notice with the Florida Department of Agriculture & Consumer Services. Exemption notices must be filed annually in the State of Florida. The following provides a few of the common issues that come up when considering the purchase of a franchise.
1. Focus on due diligence, not SBA underwriting. Don’t focus on qualifying for your SBA will also trying to conduct due diligence on the franchise. You may quickly find yourself in an attribution error situation, where you’re too busy validating yourself for underwriting, and forget to question whether the franchise makes financial sense for you. Similar error occurs after you’ve completed the trouble to get qualified, and now you figure you must go through with it.
2. Know your recourse under F.S. §817.416(2)(a)(1-3), Florida’s Franchise Act. The remedy for such misrepresentations (by a franchisor) includes the return of all moneys invested in the franchise or distributorship and reasonable attorneys’ fees. The act defines the term person as “an individual, partnership, corporation, association, or other entity doing business in Florida” (Emphasis supplied). F.S. §817.416(1)(a). Inasmuch as the private right of action afforded under subsection (3) of the act is expressly limited to “any person,” the aggrieved purchaser must be “doing business in Florida.”
3. Make sure its really a franchise, not an affiliate or license agreement. Are you receiving exclusive territory, and the rights to expand within that territory ? Is there language that would allow the franchisor to shrink or modify your territory? What about your online sales and marketing ? If you’re unclear about where your franchise starts and the other franchisee’s territory ends, you may want to consider having the entire agreement reviewed by a franchise lawyer.
4. Trust (no don’t trust), just verify. Read the Information Statement provided with the document – the law prescribes that this be provided to you, for a reason. It contains important information pertaining to the nature of the Agreement you are entering into. If you’re not getting examples of other performing franchisees in your region, this is a flag that should raise your level of scrutiny. Talk to other franchisees – usually their details are listed in the Disclosure Document; it’s incredibly valuable to talk to someone who is already doing exactly what you propose to do. Look at the itemization of expenses as contained in the Disclosure Document, and use those figures to prepare a cash flow forecast and detailed business plan. Make sure the projected itemization is consistent to what other franchisees have experienced.
5. Look at the ability to transfer or sell. Usually, these provisions will be set out under a sub-heading “Transfer” in the Franchise Agreement. Do the events of sale or transfer require approval and if so what are the factors? Specific things to look out for include a high turnover or transfer rate (suggesting not all franchisees are successful), the existence of legal proceedings against the franchisor, and the location of other franchises. Part of being in business is dealing with lawsuits, but you may want to compare your franchise opportunity with others. Just about every business that been around for awhile will have some litigation over issues, but comparatively, you get a better assessment of the franchisor’s culture. Also, what considerations and prioritizations are give to certain franchisees who wish to expand ? Sounds presumptuous, but it comes up often if you’re successful.
6. Check for clear delegation of authorities and responsibilities. Some franchisors have complete control over all marketing, branding, training, designs, and other public facing components of the business. This is done to ensure quality control across the country, and standardize customers’ experience. From drive throughs to cell phone stores, we all can appreciate the difference between a smiling well trained employee, and someone who is just waiting to clock out. Make sure you have a clear understanding in writing of who is doing what between the parties.
You’re about to enter into a long term relationship, where you share reputations, challenges, competitive landscapes, and livelihoods. You could wing it or ask your criminal law buddy to give the documents a glance. But why go into a long term commitment blindly that could bankrupt you and your family, or worse. Franchising is an expensive, long term endeavor that warrants the efforts of third-party professionals assisting you through the steps. Sentinel Law has represented many franchisees and helped other businesses grow by converting into a franchisor model. Contact us at firstname.lastname@example.org if you wish to discuss your franchise further.
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