What are the disadvantages?
There are also disadvantages that you should consider before investing in a franchise:
You lose control. The franchisor sets the rules. You must follow standardized procedures and offer certain products.
The franchise agreement is prepared by the franchisor, and naturally favors the franchisor. If you're buying from a well-established franchisor, you have unequal bargaining power and sometimes little room to negotiate the terms.
The royalty fees you pay are based on a percentage of annual gross sales, not profits. You must pay them even if you're losing money.
The standard franchise agreement may restrict your transfer of ownership, preventing you from selling the business to the highest bidder or bequeathing it to your spouse without the franchisor's prior approval.
The termination clause in your contract may let the franchisor terminate the relationship by canceling the contract or not renewing it. This can punish franchisees who don't toe the line.
Because you're buying into a name, you're also getting any problems associated with that name. If there's bad publicity about the national company, or even if your customers get lousy service from another franchisee, you'll be socked with guilt by association.
The franchise agreement may be only for a period of five or ten years. After that, you may not be able to continue your business.
Finally, you must file annual reports with the franchisor, which involves voluminous, cumbersome paperwork.
American Bar Association Family Legal Guide Copyright © 2004 American Bar Association