Monday, October 27, 2008

Buying From an Existing Franchisee-Pros and Cons

Unfortunately, many franchise lawyers only hear from franchisees when there are problems and the franchise does not work out as planned. One such instance is when a franchisee has not bought a franchise direct from the franchisor, but has taken the franchise over from an existing franchisee. This is not always a dire circumstance, but it does require a prospective franchisee to do some due diligence as the franchisee should when buying direct from the franchisor. Indeed, there are certain advantages. Assuming that the franchise is already in operation, there may be little left to mystery and the new franchisee doesn't have to start from the ground up. For example, there is already information on the location, the real estate is in place and if the new franchisee is very fortunate, the current employees of the franchise are also in place saving the new franchisee the hassle of hiring new employees and going through an interview process. Also, hopefully, there's an existing customer base with all of its goodwill attached. But try to think of the purchase as also having the downsides of buying a used car or someone's home. As with such cases, the prospective franchisee should try to ascertain why the original franchisee is leaving. It may be for family reasons or the need for change, but you do not want it to be because there is a poor relationship with the franchisor which you may inherit. The financial history may show that the business did well, but are there changes in the market place or local demographics that suggest a trend in the opposite direction? A new franchisee should also check out the terms of the Franchise Agreement very carefully to make sure they can be in compliance for future operations and that there aren't unpleasant surprises triggered by any franchisee transfer.