Buying an Existing NJ Franchise Business

Buying a Franchise in New Jersey

Buying a franchise provides you with instant name recognition for your product(s), service(s), and business.  You also benefit from the franchisor’s experienced training and day-to-day support.  An added benefit is that you’ll also have an established business with a known address. But purchasing a franchised business is no different than purchasing any other investment: there’s no guarantee of success, and you must do your due diligence.

The Benefits and Responsibilities of Franchise Ownership

A franchise, with its system(s), enables you, as an investor or future franchisee, to operate your business effectively. You pay a franchise fee, and you get to use an operational system developed by the company to help you run the business, together with the right to use the franchisor’s name.  For example, a franchisor generally assists you by finding a location for your operation, providing initial training, delivering a detailed operations manual, and offering advice on management, marketing, and personnel. The franchisor may also provide support through periodic newsletters, a toll-free telephone number, a website, and scheduled workshops, seminars, and annual meetings.

Buying a franchise may reduce your investment risk by enabling you to associate with an established company. However, the franchise purchase costs are generally substantial. In addition, you will have other costs of doing business: for example, royalty payments, a contribution of a percentage of your gross sales toward local or even national marketing campaigns, and upgrades to facilities and/or equipment on a pre-scheduled basis. When you buy a franchise, you must be prepared to give up some autonomy over your business as you take on contractual obligations with the franchisor, which are claimed (so says the franchisor) for both of your mutual benefit(s).

Buying a franchise involves many more details and checklists than the purchase of a non-franchised business

In addition to the normal pre-closing checklist items, you must take the time and effort to read the franchise agreement, which has been written by the attorneys for the franchisor, and to which you will be legally bound once you close on your franchise.

You need to understand your pre- and post-closing obligations, which will be assigned to you by the current franchise owner.

To become a lawful franchisee, you must obtain the consent of both the franchisor and the landlord for the location where the franchise operates. To protect you, Hanlon Niemann & Wright can review the franchise agreement and incorporate the mandatory franchise-related clauses and contingencies into the purchase and lease agreement(s).

Our firm has many years of experience helping clients evaluate the purchase of a franchised business. Our clients appreciate our quality legal work and prompt, responsive service. If you plan on purchasing a franchised business in New Jersey, contact Fredrick P. Niemann today.

The Purchase and Assignment of Ownership to an Existing Franchise in NJ

Signing a franchise purchase agreement if you are the buyer.

As previously stated, before transferring, assigning, or purchasing a franchise or an interest in a franchise, the franchisee must notify the franchisor in writing. Generally, the required notice must include (1) the transferee’s name, address, financial qualification(s), and (2) business experience during the previous five (5) years.

If the seller fails or overlooks notifying the franchisor before selling the franchise to you and fails to satisfy his/her pre-sale obligations to the franchisor, the franchisor can and likely will allege a breach of the franchise agreement and terminate your franchise, after you close.

Once notice of the proposed sale is given, the franchisor will have a period of time, generally sixty (60) days, to send a written response either approving the transfer or setting forth the reasons for denying the transfer.

NJ franchise laws impose a commercial good-faith standard on the conduct and affairs between a franchisor and a franchisee. Accordingly, the franchisor must act in good faith when conditioning or refusing to approve a franchise transfer to you.

When Purchasing a Franchise, You Need to Act With Caution! Don’t risk a costly mistake. Reach out to Mr. Niemann personally today at (732) 863-9900 or email him at fniemann@hnlawfirm.com to schedule a low-cost and convenient consultation about your NJ franchise matter.

The Real Costs of Purchasing a Franchise

Initial Franchise Fees and Other Expenses When Purchasing a New Jersey Franchise

Your initial franchise fee will range from several thousand to several hundred thousand dollars and is often non-refundable. In addition, you will incur high costs to rent, modernize, upgrade, and equip a franchised location, as well as to buy initial inventory. You may also have to pay for operating licenses and insurance, as well as a “grand opening” fee to promote your new business.

Advertising Fees to the Franchisor

You will also have to pay into the franchisor’s sponsored, managed and operated advertising fund. Some portion of the advertising fees may be allocated to national advertising or to attract new franchise owners, rather than to promote you individually within your market. The advertising and marketing expenses should promote you in NJ and not some franchised location(s) near the franchisor’s national headquarters in, say, Nashville, Tennessee, so check this out carefully.

Control Over Management and Operations of Your Franchise

To ensure uniformity, consistency, and quality, franchisors will place controls on how you conduct your business and restrict your ability to exercise your own business judgment, including:

• Site Location, which almost always must be approved by the Franchisor
• Design and Appearance Standards for the interior and exterior of Your Franchise Business
• Restrictions on Types of Goods and Services You Sell
• Guidelines, Requirements and Restrictions on the Method of daily and monthly Operation(s) and reporting, including, for example –
  • Minimum daily business hours;
  • Pre-approved signs;
  • Standardized employee uniforms;
  • Advertisements and marketing campaigns;
  • Accounting programs;
  • Computer and bookkeeping procedures
• Geographical restrictions on Sales Area – A franchisor will limit your business to a specific territory.

Investigating Before You Invest: Read the All-Important Disclosure Document

Before you invest in any franchise, get a copy of the franchise disclosure document. Under Federal law enforced by the Federal Trade Commission (FTC), you must receive a Franchise Disclosure document at least 14 days before you are asked to sign any contract or pay any money to the franchisor or an affiliate of the franchisor. You have the right to ask for — and get — a copy of the disclosure document once the franchisor has received your application and agreed to consider it. Indeed, you may want to get a copy of the franchisor’s disclosure document before incurring any expenses to investigate the franchise offering, if the franchisor will release it. Many won’t.

The franchisor may give you a copy of its disclosure document on paper, via email, through a web page, or on a disc. The cover of the disclosure document should have information about its availability in other formats. Make sure that you have a copy of the document in a format that is convenient for you and keep a copy for reference.

Read the entire disclosure document. Do not be shy about asking for explanations, clarifications, and answers to your questions before you invest. Among the key sections in a complete disclosure document are:

Franchisor’s Background

This section explains how long the franchisor has been in business, likely competitors, and any special laws and government regulations that affect the industry, such as license or permit requirements. This will help you understand the costs and risks you are likely to take on if you purchase and operate the franchise.

What is The Franchisor’s Business Background?

This section identifies the franchise system’s expectations and describes their backgrounds and business experience. It is not limited to just their experience in the franchised business. Pay attention to their general business backgrounds, their experience in managing a franchise system, the success of their franchisees, and how long they have been with the company.

Litigation History is a Red Flag

Whether the franchisor or any of its executive officers have been convicted of felonies involving fraud, violations of franchise law, unfair or deceptive practices law, and/or are the subject of any state or federal injunctions involving misconduct is a critically important detail. It also indicates whether the franchisor or any of its executives have been held liable for, or settled, civil actions involving the franchise relationship. Lawsuits and judgments against the franchisor may indicate that it has not performed according to its agreements, or, at the very least, that franchisees and the franchise business have been underperforming.

This section should also state whether the franchisor has sued any of its franchisees in the last year or so, a disclosure that may indicate common problems in the franchise system. For example, a franchisor may sue franchisees for failing to pay royalties, which could indicate that franchisees are struggling to turn an adequate profit and, therefore, are unable or unwilling to make their royalty payments.

Bankruptcy

This section discloses whether the franchisor or any of its executives have been involved in a recent bankruptcy. This information can help you assess the franchisor’s financial stability and whether the company can deliver the support services it promises.

Do you have questions about your franchise disclosure document? Contact Fredrick P. Niemann, Esq. at (732) 863-9900 or email him at fniemann@hnlawfirm.com for an in-depth review and discussion before signing on the dotted lines.

HERE’S AN IMPORTANT TIP!

Talk to current franchisees and former franchisees who have left the franchise within the last year or two.  This conversation may be the most reliable way for you to verify the franchisor’s claims. I encourage this approach as an independent way to evaluate the franchise relationship since it directly involves you and your future relationship with the franchisor.

Some franchisors may provide you with a separate list of franchisees to contact. To ensure that you get the full picture, you will want to contact some references not listed in the disclosure document.

There’s no question that the disclosure document is critical reading for potential franchisees.

Associations of franchisees operating their franchised business can be another important source of information. Whether or not these associations are sponsored or endorsed by the franchisor, they can provide information about the state of the relationship between the franchisor and its franchisees. You may want to ask a franchisee association about:

• Membership
• History
• Goals
• Relationship with the franchisor
• Benefits in buying from this prospective franchise versus a competitor’s franchise
• Problems franchisees are facing in the operation of their business

Before You Sign the Franchise Agreement

The company’s disclosures may change between the time you receive the disclosure document and the time you sign the franchise agreement. A company is required to update its disclosures at least annually after its fiscal year ends. You have the right to ask for a copy of any updated information before you sign the franchise agreement. An updated disclosure document may give you information indicating the filing of new suits by or against the franchisor, changes in the franchisor’s management team, new financial data, and more current financial performance data.

Additional Sources of Information

Accountants and Lawyers

In addition to reading the company’s disclosure document — including any updates — and speaking with current and former franchisees, consider talking to an accountant and a NJ franchise lawyer. An accountant can help you understand the company’s financial statements, develop a business plan, assess any earnings projections and the assumptions they are based on, and help you pick a franchise system that is best suited to your investment resources and your goals.

An experienced franchise lawyer can help you understand your obligations under the franchise contract. These contracts are usually long and complex. Because a contract problem that arises after you have signed the contract may be very expensive to fix, if it can be fixed at all, choose a lawyer who is experienced in franchise matters. Contact Fredrick P. Niemann, Esq., a trusted NJ franchise law attorney. He can help you navigate the process of deciding whether to purchase a franchise.

NJ Government Regulations of Franchises

Several states regulate the sale of franchises. NJ, however, has a very weak regulatory structure involving franchises. You will not find much help under NJ law. That is why you should reach out to our firm to discuss your prospective NJ franchise.

At Hanlon Niemann & Wright, we’ll work to protect you legally and offer practical advice in the real world of NJ franchises. Whether you need assistance with just one contract or franchise matter or would like an ongoing relationship with a NJ franchise law attorney whom you can call on for all your legal needs, contact Fredrick P. Niemann, Esq. toll-free (732) 863-9900 or email him at fniemann@hnlawfirm.com.

 

 

Written by Fredrick P. Niemann, Esq. of Hanlon Niemann& Wright,  a Freehold Township, Monmouth County, New Jersey Buying a Business Attorney