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Buying Into a New Franchise System

Written by: Colin Mackie

Article Overview: Being the 'First cab off the rank' - the first Franchisee into a new franchise system is very risky and it need twice as much thought and consideration before commiting oneself to a binding contract. However, there are some very positive aspects to being the number one Franchisee. You will need to be braver, spend more time investigation the offer and getting to knoe the integrity of the Franchisor. Special deals and special conditions can be negotiated which will be of benefit to both the Franchisee and the Franchisor.

Buying Into a New Franchise System

Buying Into A New Franchise System
The First Cab Off The Rank

If everyone listened to the advice of their solicitor or accountant about the risks of being the very first, or one of the first few franchisees into a new Franchise System, no new franchise concept would ever get off the ground.

Undoubtedly, there are more risks in being the “trail-blazer” and investing your hard earned dollars into someone else’s dream. However, like almost everything in life, there are both positives and negatives in being the first into a new system and, for many people who have an optimistic and adventurous attitude, the rewards can be quite significant.

An expression that is rarely used in Legal and Accountancy circles is “Commercial Reality”. A franchise agreement is riddled with obligations for both the Franchisor and Franchisee to meet with Non-compliance triggering a sequence of events that can culminate in termination but “Commercial Reality” is not, and cannot be, written in such documents.

Many solicitors will frighten the living daylights from a client by telling them, “Do you realise that, according to this agreement, if you don’t wear the company hat the Franchisor can put you in breach of your franchise agreement and you could lose your business?” And the solicitors are probably correct, according to the legal implications, but what about “Commercial Reality”.

The most powerful word in the English language is “WHY”. Why would the Franchisor want to close down your franchise? Why would he want to have you listed in the disclosure document as a termination? Why would he want to spend $30,000 – $40,000 in legal fees to take you to court simply because you didn’t wear your hat?

The Franchisor, we hope, is not stupid. If it was an oversight and you had left your hat at home – so be it. If you are a regular offender, the Franchisor would want to know why you refuse to wear it. He will explain that franchising is about standardisation and you must wear your hat as it breaches both health and safety regulations, as well as the franchise agreement.

If you still do not comply, he has two options:


Option 1: The tough stance
a. He sends you a series of breach letters to rectify the problem,
b. He suggests that you sell your franchise to someone with more common sense than yourself, who understands Intellectual Property and branding and, lastly
c. He puts you in the hands of his lawyer and makes an example of you.

Option 2: “Commercial Reality”
a. He finds a hat that you don’t mind wearing,
b. He gives you an exemption for some reason, or
c. He simply turns a blind eye.
99% would opt for the “Commercial Reality”, option 2.
So, what has this to do with being the first Franchise into a new system?
Firstly, you have to understand how much money, time, effort and personal commitment the Franchisor has invested to get his concept to the position where he is ready to offer you a Franchise. In many instances, we could be looking in the hundreds of thousands of dollars with two, three or more years of development.
If you accept the challenge and proceed with the offer and you fail, the last few years of effort and a future full of dreams and goals evaporate, like the morning dew, for the Franchisor. He needs you to succeed. He will do everything in his power to make you successful. His gratitude to you should be unbounded.
This is “COMMERCIAL REALITY”.

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Article Tags: accountant, adventurous attitude, breaches, commercial reality, disclosure document, earned dollars, franchise agreement, franchise concept, franchise system, franchisee, franchisees, franchisor, legal implications, living daylights, oversight, sequence of events, solicitor, solicitors, standardisation, trail blazer



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