Needless to say, 2020 has been a terrible year personally, and business-wise, for so many of us. The franchise world has suffered, as well, especially in the food, spa and physical fitness industries.
However, the entrepreneurial spirit never dies. Never, as it is simply a natural human desire for so many people throughout the world. And so, not surprisingly, even now there are investors searching for franchise business opportunities. Many understand that the time to onboard into a franchise system and open a new business is optimal. I say this because the typical brick and mortar franchise business takes roughly a year from signing of the Franchise Agreement to the business opening. By all credible accounts, commerce should be returning to normal within a year. Therefore, this may be the ideal time to purchase a franchise business.
My sense, which is not yet backed-up by any industry data (so take this with a grain of salt), is that many franchise industries are now buyers’ markets. There are many opportunities, but not enough demand to fill all the expansion goals of the Franchisors.
However, the aspiring Franchisee needs to be cautious about their investment during these difficult times and not rush into franchise agreements without sufficient due diligence. Ask these tough questions: Will your Initial Franchisee Fee be used to simply prop-up an ailing franchise system? Is the Franchisor’s system financially sound and able to train and support you? And moreover, will there be sufficient numbers of customers coming in through your doors to make the investment of time and money worthwhile?
In the buyers’ market, you have greater leverage to negotiate and insist upon transparency when it comes to the Franchisor disclosing the health of their system. Are they growing, flat-lining or declining? How stable is their management team? Are they a first-generation Franchisor, or an investment group which recently acquired the franchise system and is making material changes? How many of their franchisees walked-away last year, transferred or terminated? How many new territories did the Franchisor add in 2020?
If you hear stellar, breathless responses to each of these questions, then look harder. Realistically, most franchise systems took a hit in 2020. So, if your potentially Franchisor is not up-front about their struggles and well-thought-out plans to address the set-backs, then move-on to the next prospect.
This year separated the wheat from the chaff in the franchise world. Find out now whether your potential Franchisor stepped-up to the challenges and protected their Franchisee/investors to the best of their abilities (ask the current Franchisees and talk to as many of them as possible). If the Franchisor did not or could not do so, then move-on to another franchise opportunity. Avoid becoming emotionally or psychologically locked-into one franchise. This is not always easy, but it is absolutely necessary to ensure that you make the right decision.
Here’s the pitch: Do not attempt to wade into these waters without professional assistance. Consider not only hiring an attorney to assist in the FDD documents review and negotiations, but also an accountant with franchise experience to review the financial statements and advise you of any red flags. If you do not have extensive business experience, or lack experience in the industry you are focused-on, then consider adding a business coach to your team.
In the coming few months, expect a strong sell from franchise salespeople seeking your signature and Initial Franchise Fee. They will stress that this is a great time to sign, and to do so before the FDD documents are revised in the 1st Q 2021, which, they will often represent, likely will include higher fees or more restrictions. This is the typical sales pitch this time of year (yes, fees often go up, but not to the extent or amount which would justify you throwing caution to the wind).
Understand that the franchise system data you receive now is limited to pre-December 31, 2019 (assuming the franchisor follows the calendar year for tax purposes). Therefore, this information precedes the COVID-19 disaster, which did not start biting into franchise numbers until near the end of the 1st Q 2020. These statistics and financials are stale and will not give you an accurate picture of where the Franchisor stands financially at the end of 2020.
You have the option to wait until the revised 2021 FDDs become available late in the 1st Q, or possibly into the 2nd Q 2021. The revised FDD will disclose financials and system-wide franchisee tables through the end of 2020. Keep in mind that any Franchisor doing business in one of the several registration states must re-file its FDD documents, and obtain approval to sell franchises, on an annual basis. Most Franchisors file their re-registration applications shortly after receipt of audited financial statements, which come in throughout the 1st Q.
Be patient in your search for the perfect franchise business and be diligent.
Good luck with your franchise investment hunt. Best wishes for a healthy and joyous holiday season and for a prosperous 2021!
BE ADVISED that these comments are not intended as legal opinions and are not to be relied upon as legal advice. If you need franchise-related legal advice, please contact us to discuss the specifics of your franchise business.
© KilcommonsLaw, P.C. 2020