Is one of your New Year’s resolutions this year to own your own burger franchise? Zac’s Burgers can help you make your wishes a reality with this Entrepreneur’s checklist for buying a burger franchise in 2019.
Know Exactly How Much Money You Need
Initial startup costs and financial requirements for buying a franchise can vary from $10,000 to a couple of million so it is important know exactly what your goal is first.
Save as Much Money as Possible
While you will most likely need some sort of loan to get your burger franchise up and running, you will stay more financially healthy if you save as much as possible so you only need a small loan.
Know the language
For the best success you should have a good understanding of not only what franchising, but also key franchise terms that you will hear as you start on your franchising journey. Here are some of the most common terms.
- Franchise: A franchise is an agreement between two legally independent parties which allows a person or group of people (franchisee) to market a product or service using the trademark or trade name of another business (franchisor).
- Business format franchise: With this type of franchise not only does the franchisee use the product, service and trademark, but they must also use the complete business method of the franchisor.
- Product distribution franchise: With this type of franchise, the franchisee only sells the franchisor’s products or services, but doesn’t have to follow a specific method of conducting business.
- Royalty: This is the regular fee the franchisee pays the franchisor for the right to sell their products or services. It is usually based on a percentage of the franchisee’s gross sales.
- Trademark: The brand name and logo of the franchisor.
- FDD: The Franchise Disclosure Document is the disclosure document that details information about the franchisor and the franchise system.
Understand your rights
Because franchising is governed by federal and state laws, you need to have a clear understanding of not only the legal requirements for owning a franchise, but also your rights as a franchisee. Franchise experts recommend that your hire an experienced franchise attorney to help you navigate all the legal paperwork. There are two legal documents that you will need to sign: the FDD, which lays out information about the franchisor and the franchise system, and the franchise agreement.
- How much are initial start-up costs? Is this doable for me?
- How long does it take to see a profit? Do I have enough money to keep everything afloat till then?
- Does the franchisor offer adequate training and ongoing support? What do they offer for advertising and marketing?
- Where will my franchise unit be located? Will I get rights to certain territory?
Filling Out the Financial Disclosure Document
One of the most important documents you will receive as a potential franchisee is a financial disclosure document also known as the FDD. The FDD is a legal document that lays out all the information about the franchisor and the franchise system.
About two weeks before you sign the franchise agreement, you will be given the FDD from the franchisor as mandated by the Federal Trade Commission.
Pay attention to these key items in the FDD.
Item 3: Litigation. All current and past criminal and civil litigation for the franchisor, both those against them and those they are pursuing. Consider it a red flag if you see a bunch of lawsuits from franchisees against the franchisor or if there is a pending class action by consumers. These things could bankrupt the company. However, keep in mind that it is natural for larger franchisors to have more pending cases of litigation than smaller ones.
Item 4: Bankruptcy. In this section will be listed any bankruptcies that the franchisor or its management is going through.
Item 11: Franchisor’s obligations. This is the part of the document which should outline what services you can expect from the franchisor like site selection, training, marketing/advertising, and developmental and operational assistance. Watch the language used in this section so it is clear what they are required to provide you and what they “might” offer you.
Item 12: Territory. Here is where you will see if you have any exclusive rights to any territory. Keep in mind that when you renew your contract these rights may change. Stay away from franchisors who don’t offer you any territory protection at all.
Item 13: Trademarks. Any pertinent information about the franchisor’s trademarks and trade names will be included here.
Item 14: Patents, copyrights and proprietary information. Read this section for clear instructions on how you can use the patents and copyrights.
Item 17: Renewal, termination, transfer and dispute resolution. This section will lay out clearly what your rights are as a franchisee and what rights you are giving up to the franchisor to be part of their program. Two important things to nail down in your negotiations are the length of renewal periods and how many you are entitled to.
Item 19: Financial performance. Not all franchisors will provide information about their financial performance. If they do not lay it out here ask them for it one on one or reach out to a few of their current franchisees for some of this information.
Item 20: Franchisee information. Pay attention to how many units the franchisor has taken back and resold. A high number could indicate a high turnover. If contact information is provided for franchisees who have left the system, then see if you can reach out to them and pick their brain about the pros and cons of the franchisor.
Item 21: Financial statements. The franchisor should provide you with copies of financial statements for the last three years. Make sure to have an accountant who specializes in franchising to look them over for you. Make sure you pay attention to both the balance sheet and the income statement. Remember that a franchisor with a troubling financial outlook will spell trouble for you if they continue to have problems.
Item 22: Contracts. Check to make sure that any contracts listed in this section are attached to the FDD. Don’t forget to go through each of them very carefully before making any final decisions.
Another thing you will want to watch out for is that the information here in the FDD is consistent with the information in the franchise agreement. If there are a lot of discrepancies, then you should raise your concern to the franchisor. You will want to make sure that they are not trying to hide anything from you.
Armed with the right information, the burger franchise buying process will go without a hitch and 2019 could be the year all your dreams come true. For more information on burger franchises, call Zac’s Burgers.