What to Know Before Buying a Restaurant Franchise

We know how exciting it is for a new restaurant franchise owner on opening day. However, there is a long road that new owners must go down before they can get to that day of celebration. The reality is that there is a mountain of paperwork and legal documents that must be reviewed and signed. This can all feel overwhelming if you’ve never bought a franchise before. Having legal guidance can help you know what to look for before you commit to buying a restaurant franchise.

Key Takeaways

• Buying a restaurant franchise means entering a long-term contractual relationship.
• The relationship with the franchisor matters.
• The Franchise Disclosure Document (FDD) provides important details about the franchise opportunity.
• The purchase price is only one part of the investment.

What Buying a Franchise Means

On the surface, buying a restaurant franchise means you are buying a business opportunity. It is a contractual agreement where each party gives something of value to receive a benefit. You are paying money for the right to use an established brand and business model. The franchisor is receiving money for their sale of the franchise.

Buying a franchise isn’t like starting your own business from scratch, though. The franchisor retains their ability to have oversight. They have an interest in protecting their brand reputation. Because of this, you don’t have complete freedom or control over your new restaurant business. In exchange for giving up control, though, you have a support system.

In addition, you may be required to meet certain quality standards. Some franchisors perform routine inspections to ensure each franchisee adheres to their agreement. Depending on your contract, the franchisor could control every aspect of the business, from the menu to the suppliers franchisees can work with.

Partnerships Are Key

Not every franchise relationship looks the same. Some franchisors take an active role in franchisee business management with a hands-on approach. Other franchisors expect franchisees to be more self-sufficient, taking a more hands-off approach. Neither approach is automatically good or bad. However, it's important to know which approach will blend better with your approach to business ownership.

Problems often arise when expectations don't match reality. New owners may feel abandoned after opening if the franchisor isn’t as supportive as they want. Others may become frustrated by strict oversight and limited flexibility. Before buying a restaurant franchise, ask how training, ongoing support, marketing assistance, and day-to-day communication are handled. Finding a franchisor whose approach aligns with your management style can make a significant difference.

Review the Franchise Disclosure Document (FDD)

Anyone researching how to buy a restaurant franchise will eventually come across the Franchise Disclosure Document, or FDD. It's required by federal law and gives prospective franchisees detailed information about the franchise before a sale can progress. Although it's meant to help you evaluate the opportunity, the document can easily run hundreds of pages and includes both legal and financial information that deserves careful attention.

As you review the FDD, pay close attention to topics such as:

• Upfront franchise fees and estimated startup expenses
• Continuing royalty and advertising payments
• Financial performance data
• Past lawsuits and bankruptcy filings
• Your ongoing responsibilities
• Exclusive territory information

The FDD provides valuable information, but it doesn't tell you whether the business opportunity makes sense for your specific goals or identify every legal concern. That's one reason many buyers choose to have an attorney review it before moving forward.

Read the Franchise Agreement Before You Sign

Always read legal documents in their entirety before you sign them. Once you put your signature to paper, you are taking on the responsibility that the terms outline. You can’t go back later and say that you want out of the agreement simply because you didn’t read the agreement.

The franchise agreement is the primary contract between the franchisor and franchisee. It will govern the relationship’s details. It should include the length of the franchise term and renewal options. It will outline the default provisions, termination rights, and personal guarantees.

There may be additional requirements on the franchisee to obtain licensing or permitting. These additional duties must be done, or the franchise risks being in breach of the contract.

Evaluate the Financial Commitment Beyond the Purchase Price

It’s easy to become focused on the purchase price. This is the number that presentations typically focus on. However, that single number isn’t the only one to consider. As a franchise owner, it’s crucial to understand the full financial commitment you are making. Otherwise, your new restaurant franchise is at risk before it even gets started.

There are several costs associated with purchasing a restaurant franchise. There are build-out and equipment costs to get the business set up. You will need working capital to cover employee hiring costs, payroll, inventory, and insurance. You will likely have to pay royalty fees and make marketing contributions. There may also be required technology or software costs to get the infrastructure set up. Once established, there may be required remodeling obligations imposed by the franchisor.

Work With an Attorney Before Buying a Restaurant Franchise

The paperwork involved in buying a restaurant franchise isn't something you should rush through. An attorney can do more than explain the legal language. They can help you understand how the Franchise Disclosure Document (FDD), franchise agreement, and lease work together and how those documents may affect your goals as a business owner. They can also identify contract terms that deserve a closer look, discuss the right business entity for your situation, and answer questions before you make a long-term commitment. Getting legal guidance before you sign often costs far less than trying to resolve a dispute after your restaurant is open.

Start Your Restaurant Franchise Buying Journey

Buying a restaurant franchise is a significant investment. Make sure you've looked beyond the sales presentation and carefully reviewed the legal and financial commitments involved. Taking the time to understand the terms now may help you avoid disputes and unexpected expenses later.

Jameson & Powers, P.C. works with Texas entrepreneurs on business transactions, contract review, and other legal matters that arise before and after a franchise purchase. If you're ready to explore a franchise opportunity, schedule a consultation to protect your investment from the start.