“Welcome to the Dynamic World of Mobile Pretzel Retailing!”
By: Justin M. Klein and Scott D. Salmon – Marks & Klein, LLP
The “Simpsons Already Did It,” an episode of Comedy Central’s South Park, proclaimed that everything conceivable has already been explored in-depth by the epic animated series The Simpsons, now in its twenty-seventh season. In fact, The Simpsons have covered a wide array of topics—including buying a franchise and even the intricacies of franchise law! The authors of this article are not only dedicated Simpsons fans, but are self-pronounced franchise nerds. To that end, upon reflection, we are convinced that the two episodes, “The Twisted World of Marge Simpson” and “Super Franchise Me” were made exclusively for us, notwithstanding that the Simpsons regularly yields millions of viewers. Either way, these two episodes are an exemplary display of the inner workings of a franchise investment and serve as unexpected guidance for anyone interested in purchasing or operating a franchise. Let’s walk through the process together.
Why Do You Want a Franchise?
This is the most important question you can, and must, ask yourself. Marge Simpson bought a pretzel franchise because she was angry her friends kicked her out of their “investing club.” She did absolutely no research on the franchise and reacted solely to her friends purchasing a “Fleet-a-Pita” franchise, which she admits she might have possibly been interested in. That isn’t a good enough reason.
Do you want to run your own business? Marge wasn’t even sure, and admitted she knew nothing of running her own operation. Are you willing to take on the time commitment, financial commitment, and most importantly, the risks, of a franchise? Not all franchises turn out to be million-dollar enterprises. You need to make sure you are truly committed to your business before you make an investment. Also, you need to ensure that you are conducting the proper due diligence into the investment once you narrow down your options. Lastly, it is important to distinguish between a great product, and the ability to be successful selling that product.
The Process of Purchasing a Franchise
There are a number of ways to find a franchise that suits your interests and skills. You can search online for opportunities, there are franchise brokers that will help guide you through the process, or you can do as Marge did and go to a Franchise Expo. You will see bad franchises, such as a Picture Perfect Frame Nudging Franchise and Disco Stu’s Can’t Stop The Learnin’ Disco Academies. There are franchises that will try to convince you that you will make a fortune with them, guaranteed. Don’t fall for Disco Stu’s argument that sales of vinyl records in 1976 will mean a windfall for you.
It’s easy to get star struck by glamorous franchisors through flashy gimmicks or swayed by likeable salesmen, as happened to Marge. In the United States, prior to purchasing a franchise, franchisors are required to provide you with a Franchise Disclosure Document (“FDD”). This prospectus includes a vast amount of information to assist you in the due diligence process such as the costs and fees associated with running the franchise, whether the franchisor has been sued and for what, the names and contact information for current and former franchisees with whom you should speak to learn about their experience with the franchisor as well as all contracts you will be required to sign when you purchase the franchise. Marge was only provided a thirty-minute episode to tell her story, so, rather than review the FDD or take it to a lawyer (she didn’t even get one), she handed over the $500 franchise fee without asking even a single question.
It’s important to review and understand the FDD, the Franchise Agreement and all other required contracts before you sign anything or hand over any of your hard-earned money. It is imperative to work with experienced legal counsel who can help you navigate through the sales process. For example, at Marks & Klein, we routinely review, draft and negotiate all documents related to a franchise investment. There are many questions qualified legal counsel can help you answer so that your investment decision is informed:
-What services is the franchisor providing?
-What is your territory?
-What type of training will the franchisor provide?
-What additional costs, fees, and royalties will the franchisor require you to pay throughout the term of the Franchise Agreement?
-What financial performance representation has the franchisor made, and how have those representations been determined?
-Under what circumstances will the franchisor be able to terminate your franchise?
-What happens if your franchise is terminated?
-What is the importance of a personal guarantee?
-How can I protect myself from lawsuits?
Operating Your Own Business
Once the excitement of buying a business, your business, passes, the realities of operation come into focus. There can be no reward without hard work, and operating a small business requires hard work. Do you have any experience running a business? Can you learn, or will you hire someone that you trust implicitly to run the show for you? Marge struggled with interviewing employees, as well as managing and firing incompetent staff. This is perhaps the biggest struggle of running your own business, and with your life’s savings on the line, it isn’t something that you can afford to ignore.
“How could they open another franchise so close to me?”
Furthermore, in both franchise episodes of The Simpsons, Marge faces a very real problem of competition, both from within the franchise and outside. This is true in the real world as well, and is enough to sink many franchises before they even get going. You need to be sure that you consider your rights and obligations under the franchise agreement and for example, the impact of the franchisor being able to open a new location across the street from yours. You also need to be aware of the businesses or franchises that you will be competing with, and figure out how you can get an edge on them.
Terminating the Franchise Agreement
Some businesses just don’t work out. Maybe it’s the business model, lack of support from the franchisor, or maybe it’s competition taking away the franchisee’s profit margin. How do you get out of the Franchise Agreement? Unfortunately, it is not always as simple and straightforward as The Simpsons made it seem to get out of a bad franchise investment. Faking an injury and threatening a lawsuit does not usually yield the type of result that Marge achieved. However, knowing the rules of engagement and the ramifications of terminating the franchise relationship before you make the investment is critical to the decision making process. Is there a non-compete, are there liquidated damages, can I sell my franchise and if so, how?
Next to buying a house, a franchise purchase is likely the largest investment those going down that path will ever make in their lifetime. It is important to not rely solely on blind faith in the product, the service, or your franchisor to ensure that your experience is a success. You need to be prepared for the seriousness of the investment and surround your self with experienced advisors to help in the decision making process. Informed investors have the greatest chance at success, and most critically, are better positioned for failure. Thank you to The Simpsons for recognizing the franchise process, and for delivering a very important message in a humorous way. We look forward to serving as consultants to The Simpsons on the third installment: Lionel Hutz (Franchise Lawyer and Expert Shoe Repairer) helps Ned Flanders franchise his very successful Leftorium store to malls across the world. Stay tuned!