When considering franchise opportunities, it is important to understand that you are involved in a sales process. If you are a strong candidate, franchisors will want to sell you on their systems, and you will work with salespeople who get paid on commission to entice prospective franchisees to enter into franchise agreements.
During this process, you will likely hear about several “benefits” that each franchise system has to offer. But, in many cases, these benefits can actually be limitations and restrictions in disguise. Let’s take a look at some examples:
Benefit or Drawback: Common Selling Points for Franchise Opportunities
1. Designated Suppliers
In product-based franchises and franchises that offer a mix of products and services (such as fitness gyms and cleaning franchises), it is common for franchisors to require their franchisees to make purchases from designated suppliers. There are a number of ways that this can be promoted as a benefit, from maintaining uniformity among franchisees to limiting your sourcing burdens and ensuring the quality of the products that go on your shelves.
However, designated (or mandatory) supplier provisions come with drawbacks as well. For example, suppose your franchisor’s designated supplier falls behind on deliveries. Or, what if its products simply do not meet your (and your customers’) expectations? If you are contractually bound and unable to consider alternatives, these could present real problems for your franchised business.
2. Advertising Funds
A system-wide advertising fund can provide significant benefits for the right franchisees in the right franchise systems. But, before you commit to contributing a percent of your monthly revenue, there are some important considerations to keep in mind. For example, under a typical franchise agreement, franchisees are not guaranteed to see any benefits from their contributions. If the franchisor thinks it can earn the most revenue from concentrating its marketing efforts in a particular urban center and your franchise is located elsewhere, you may not see any advertisements targeting your area. Additionally, franchisors will often also reserve the right to use a portion of franchisees’ contributions for “administrative expenses,” and advertising funds are often operated with only limited transparency.
3. Franchise Territories
If a franchisor is offering franchise “territories,” it is important to understand what this actually means. Different franchisors offer different territory rights, and in many cases a territory designation is actually a restriction on the franchisee’s geographic reach and not a promise of exclusivity. Franchise territories can be “protected,” “exclusive,” or simply defined, and it may be that your territory is actually just a boundary outside of which you are unable to market your products or services.
Schedule a Free Consultation with Franchise Lawyer Jeffrey M. Goldstein
If you are considering franchise opportunities and have questions about the information you are receiving or the terms of your Franchise Disclosure Document (FDD) or franchise agreement, you can contact the Goldstein Law Firm for a free consultation. To schedule an appointment with attorney Jeffrey M. Goldstein, please call (202) 293-3947 or get in touch online today.
