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

If you are considering the purchase of a franchise it is critical to recognize that your "investment" goes beyond - well beyond - initial franchise fees and startup expenses. While franchise fees and start-up expenses (such as equipment purchases and "build-out") are critical expenses that must be evaluated, they only tell half the story.  That is, when signing a franchise agreement you will be committing yourself to a serious of legal obligations that will involve the commitment of your time, future financial resources and legal obligations for many years to come.  

So when evaluating the "cost" of a franchise, in addition to franchise fees and initial start-up costs, give some serious consideration to:

(a) Reserve Capital. Additional funds that you may be required to invest in your business/franchise during periods of unprofitability and negative cash flow.  As with any business you may very well encounter periods of unprofitability and losses.  When faced with losses and cash flow shortages you will be required to invest additional assets and resources to sustain the operations of your franchise;

(b) Your Time. The extensive time that your will be devoting to operating and managing your new franchise.  Your time is valuable and when operating your franchise you will be foregoing income and opportunities from other sources of employment.  Although obvious, this expense / opportunity cost is commonly overlooked. If your franchised business does not work out remember that your losses include missed opportunity costs and income that you would have otherwise earned. 

(c) Post-Termination Restrictive Covenants and Fees. As a franchisee in most instances you will be committing yourself to long-term obligations and restrictive covenants.  These covenants and obligations have a cost, especially when they restrict what you can and cannot do if you elect to shut down your franchise.   This is of special concern to current business owners with established reputations within a community who - for legitimate reasons - decide to become a franchisee of a national company.  

For Example - If you are a carpenter with a long established reputation within a community and you elect to purchase and become a franchisee of a national "repair" or "handyman" franchise what happens if your franchise relationship does not work out and you cancel your franchise agreement?  Will you be precluded from operating your own repair business - a business that you operated many years before becoming a franchisee?  The answer is that it all depends on the restrictive covenants contained in your franchise agreement - covenants and obligations that you should review and discuss in detail with your franchise lawyer "before" signing a franchise agreement.

So when considering the "cost" of your franchise investment you must go beyond "out of pocket" expenses and fees and evaluate the substantive impact of the long-term legal obligations that you will be committing to.

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“Unstable” would qualify as a mild assessment of the current state of our economy and the job market.  In the face of historic corporate layoffs, many skilled and hardworking individuals are considering a leap from corporate employee to small business entrepreneur and franchisee.  After speaking to many clients who have successfully made this leap, one thing is clear, before you put your savings, severance package or financial stability on the line, be prepared for some “culture shock” and understand that there are some fundamental differences between the life of a corporate employee and that of a franchisee.

Difference No.: 1 - “You are on your own”

I know this may initially sound conflicting, especially since you are considering a franchise for the very opposite reason, i.e., the support and backing that you (hopefully) will be obtaining from the franchisor and the franchise system that you select – but you must keep in mind that we are discussing the differences between life as a “corporate employee” to that of a “franchisee”.  While a franchise will afford you distinct and tangible benefits over the typical small business (benefits such as an established system, a known brand name and tested products and services) you must nevertheless remember that you will be moving from a structured corporate environment with layers of management and delegated decision making, to the “heart of small business” where every decision and every problem will be presented to you (and only you) on a daily basis.  Gone are peers and “colleagues” to “run things by” and in their place are “employees”. Employees that may even include that high school delivery boy who forgets to show up on your busiest night. 

Difference No.: 2 – “Profits Matter”

I understand that this is an obvious point.  But this is so important that it should be mentioned again and again.  So, here goes: “profits matter”.  Gone are “bad corporate quarters” that do not have a direct affect on your weekly paycheck and in its place is the reality that the success of your business will be measured on a daily, weekly and monthly basis based on how much money you earn and get to take home to your family.

Difference No.: 3 – “ Sales Skills Required”

As a franchisee and small business owner, just working hard is not enough.  You will be the face of your business and must be front and center interacting and building relationships with your customers and clients each and every day. You can’t overlook this business necessity and must make sure that you are prepared to take this step.

Difference No.: 4 – “Adjustments to your Social Calendar”

If your new business involves retail sales, be prepared for an adjustment to your social calendar. Since your new business will, most likely, experience its busiest days on the weekends, be prepared to work on the weekends and take days off on weekdays when most of your friends and family are at work.

If you have the right expectations, select the appropriate franchise and commit to hard work, the life of a franchisee can prove rewarding and add a level of independence unavailable to corporate employees.  However, before making this leap, be prepared for some culture shock and give some serious thought as to both the positive and negative adjustments that you will be required to make.  Get it right, and, hopefully, you may be on your way to adding some independence and balance to your life.   

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