New York Franchise Law Blog : Franchise Lawyer & Attorney Charles N. Internicola, Providing National Representation of Franchisees and Franchisors

This afternoon in consulting with a client who had recently signed a franchise agreement involving a substantial commitment of capital, I was reminded about the importance of maintaining "realistic" expectations when buying a franchise. When discussing his expectations about his franchise purchase and the business that he will be developing, he was extremely "realistic" as to his expectations and the work ahead of him.  That is: 

(a) He diligently evaluated the "franchise opportunity" that he was investing in and thoroughly understood that, as with many businesses, it would be a number of months and possibly years (hopefully not) before he achieved a level of profitability and acceptable return on his franchise investment; and

(b) He understood that the success of his franchise rested on the hard work, marketing and business development that he (and his family) would bring to this new business. Significantly, his approach is not one of "lets wait and see" what business comes through the door.

The most important lesson that I was reminded of by my client - a lesson that future franchisees and franchisors may also put to use - is that getting your expectations "right" is critical.  When considering a business opportunity and setting your "expectations", franchisors and franchisees should consider:

• Profitability will Take Some Time -   Profitability is not guaranteed and, depending on your particular franchise opportunity, may take 8 days (unlikely), 8 months or 8 years (hopefully not).  That is, you must plan ahead and account for the extremely realistic fact that you in selling a franchise or purchasing a franchise you must properly communicate and/or understand that reserve capital will be critical.  Evaluate the opportunity thoroughly and ensure that you have developed the correct expectation about the future profitability of your business.

• Franchisors Can't (and Shouldn't) do Everything - Buying a franchise does not mean you just pay money and then sit back and wait for business to "walk through the doors".  You must be actively engaged in the marketing and "development" of your business.  Look to your franchisor as your "partner" and not your "caretaker".  Franchisors, be selective about the franchisees that you approve - look for franchisees that will contribute to the development of your franchise system. 

Get your expectations right.

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NYC Business Solutions (a division of NYC Small Business Services), the Manhattan Chamber of Commerce and the US Department of Commerce will be conducting and coordinating a seminar - "How to Buy Your First Franchise or Grow the One you Have" -  for both prospective and current franchisees.  

Seminar Date:  February 17, 2010

Seminar Time:  8:00 AM - 10:00 AM

Seminar Location:  110 William Street, 4th Floor, New York, NY 10038

Seminar Registration Information

 If you are considering the purchase of a franchise your best resource and asset will be "information". Information about the franchisor, information about your legal rights, information about your estimated start-up expenses and information about your rights and obligations as a franchisee.  My point being attending a seminar such as the one offered by NYC Business Solutions can only be helpful in this important decision making process.

Hopefully, you will also find our articles about  buying a franchise to be helpful. Good luck.

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Part of the “Franchisor Basics” Series

Under the Federal Franchise Rule franchisors are required to disclose their “Financial Statements” in Item 21 of the Franchise Disclosure Document. All financial statements must be prepared in accordance with Generally Accepted Accounting Principals ("GAAP") and in all but an extremely limited number of situations involving a start-up franchisor, a franchisor’s financial statements must be “audited”.   In the franchise regulations (16 CFR Parts 436 and 437) FTC provides detailed information respecting a franchisor's "Item 21" disclosure requirements, including:

•  Financial statements must be audited by an independent certified public accountant and prepared in accordance with GAAP;

• Financial statements must be prepared in a "tabular" format providing for a comparison between current and prior fiscal years; and 

• Financial statements must include (a) Balance Sheet for the prior two (2) fiscal years and (b) Statement of Operations, Stockholders Equity and Cash Flows for each of the franchisor's prior three (3) fiscal years. 

Other provisions apply for "start-up" franchisors (a topic that will be discussed in future posts) and the disclosure of the financial statements of a franchisor's "affiliates". 

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In an effort to expand the information provided at the New York Franchise Law Blog and, hopefully, the timeliness and value of this information for our readers and subscribers, we will now be featuring a continuing series of succinct fact based articles (in addition to our commentary and reports) focused on the "basics of franchising", comprised of "Franchisor Basics" and "Franchisee Basics".

These articles will serve as a valuable reference tool to our readers and, as always,  it is important that you discuss the specifics of your franchise system, disclosure obligations and franchise decisions with your franchise attorney.

As always, we appreciate and welcome the comments and suggestions that we have been fortunate to receive from our readers. Please let us know if there are any specific franchise topics that you like us to address.  Thanks.

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