The Keys to Success

Everybody wants to be a part of the “next big thing.” Today’s consumer-driven economy pushes out new retail market concepts daily and they fail just as often. If timed correctly, an entrepreneur can ride the wave of a new retail concept to a very profitable and sustainable franchise-based business. Some franchise concepts last what seems like forever (McDonald’s), while others never get off the ground.

Having represented franchisees and franchisors in a wide array of retail markets, from fitness facilities to frozen yogurt, we’ve seen the good, the bad and the ugly of these relationships. The agreements behind franchises are every bit as complicated and complex as the markets in which they compete. Every franchise arrangement should be reviewed in detail with legal counsel before venturing into these waters, but we have found three key questions to be critical to every deal:

• Does the franchise model work for both parties? The first and most important matter is deciding if the business model provides a reasonable return for both parties, as otherwise the franchise will never last. The general economics of the concept, from building out of the location to product and/or service delivery, need to be analyzed in detail to make sure there is sufficient profit on both sides of the ledger to support the franchise business for the long term.
• What are the specific deliverables of the parties? It is critical to understand what the franchisor will be providing and what the franchisee must deliver in return. The most obvious is the franchise fee due from the franchisee to the franchisor for supporting the concept. But what other deliverables are there in the deal? What specific marketing has to be provided? What materials? What services? What are the performance metrics for the franchise? The more detail the better in this area in order for everyone to understand their respective roles and responsibilities in exchange for payment of fees.
• What remedies are available if it doesn’t work? Most franchise agreements, for the stability of the business, last a long time (up to 10 years or more). Specific remedies if one party fails to perform all or a portion of their responsibilities must be clear from the very beginning. If the franchisor doesn’t provide the promised support, how does the franchisee receive compensation or get out? If the franchisee doesn’t perform, how does the franchisor step in to protect its interests?

These are just a few of the more salient points when looking at franchising. Please give us a call if you are considering franchising or are in a current franchise arrangement that you need to better understand.