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Texas Restaurant Law

Is A Restaurant Franchise Right For You?

Posted in Acquisitions, Franchises, Franchising, Negotiation

We’d all like to become the next great franchise with the wealth and notoriety that goes with it. However, not all franchises are created equal, and even more often, a franchise itself is not even the right fit.

 New To Restaurants?

If you’re not already a restaurant owner, the question is “to franchise or not to franchise?” In other words, would it be better to start your own restaurant or should you buy in to a franchise? If you have little initial capital, then the answer is easy because most franchises require quite a bit of up front capital. If you do have some money stashed or a way to get it, the answer is harder.

With capital to pay the franchisor, you could buy a franchise. However, many times there are limited quantities of franchises for sale. Similarly, if you have no restaurant experience, then most franchises won’t touch you until you either obtain that experience or partner with an operator who does have experience. Either way, for most first timers, a start-up restaurant is probably better than a franchise because of the start-up costs and because of the lack of experience. Sure, many franchises advertise that they will train you, but it’s still quite a risk without prior experience. I generally steer my clients away from franchises if they have no prior experience.

Seasoned Restaurant Operators

Assuming you do have restaurant experience, the question still remains whether you should buy a franchise or start your own restaurant concept. Again, this could still depend on available capital, but let’s assume you have that. In that instance, the real question is whether you’re creative, capable of shifting your business strategy, and self-motivated. If that’s you, then a start-up, restaurant concept is probably better.

On the other hand, if you like a proven concept and can live within the franchisor’s franchise rules, then a franchise might be the very thing for you. In that case, you’ll be paying the franchisor a royalty fee for the rights to the franchise. These often come in the form of a percentage of profit, but there are many forms. Sometimes, there’s even a minimum monthly payment that you must pay first, whether or not you make any restaurant sales.

 Considering Franchising Your Current Restaurant?

There’s one last possibility. Maybe you already have a proven restaurant concept and you’re wondering if it’s time to start your own franchise to sell its rights to other people. You would then become the “franchisor”. This is very feasible, but it’s important to do it in the right way. In Texas, the Business Opportunity Act (which we call the “Act”) governs the creation and maintenance franchisors. Failure to follow the Act could result in severe liability.

As an overview, the Act provides protections for people who go into franchises based on certain promises. Therefore, as the franchisor, it’s important to provide certain disclosures to your franchisees. This protects you from claims under the Act, as well as claims of fraud or misrepresentation. I often compare a franchise offering to the offering of stock in a company. In either situation, the person making the offer (in our case, the franchisor) wants to ensure that the person accepting the offer knows the risks. If not, lawsuits arise, and no one wants that!

Overall, the question of franchising has many factors. Experience and capital are the two key considerations. And, if you’re considering franchising your own restaurant to others, make sure you follow the Act and provide good disclosures.

 Have your own franchising concerns or nightmares? Please share them with us!

About the author: Matthew Sanderson is a restaurant lawyer in Texas. “Good service with a smile” is his motto. Click here to find out more about Matthew Sanderson’s legal practice and how he can help you today. Follow him on Twitter @dealattorney.