Franchise Lawyer Blog

Selling a Start-Up Franchise

I am sitting here writing a franchise disclosure document (” FDD”) for a new franchise offering, a restaurant concept to be launched here in New York. One of my guideposts as I draft an FDD is how I would view the presentation if I were a prospective franchisee. Is the concept sound? Is the system behind it fully developed? Will the franchisee receive adequate support and guidance? Are the franchisors reliably experienced in this particular industry? All of these considerations are doubly significant in a new start-up, where there is no track record of sales and performance to go on.

A recent article appearing on FranchiseKnowHow (“How to Evaluate a Start-up Franchise Company) provided a cogent analysis of the key factors to look at when considering entry into a brand new system. The draw, of course, is the idea of getting in on the ground floor of a concept that takes off and achieves huge popularity. The concerns and necessary analysis are well-laid out in the piece: (i) look at the business that served as a model for the franchise concept – is it successful and is it replicable; (ii) break down the numbers, if they are available, if not, try to extrapolate from known models and then add in the additional costs of royalties, brand funds, etc.; (iii) what is the market and what is the competition; (iv) is the franchisor adequately capitalized to support the system?

I take these considerations back to the drawing board of my new FDD and examine the offer I am crafting. Will it be viewed favorably under such careful scrutiny? If not, its back to the drawing board and back to the client. You owe it to a prospective franchisor to alert him to potential flaws in his or her offering plan. Better that they are addressed now than in litigation with disgruntled franchisees.

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