An associate and I had the opportunity to interview a larger accounting firm this week. They shall remain unnamed to protect their brand integrity but what we found was a little appalling. Have you ever met someone in business that protects themselves so well it passes the point of protection and moves into aggression? This firm has designed an offering to their potential "Franchisee" candidates that virtually eliminates the possibility of success. This may sound naive on my part but hear me out.
They offered us an "opportunity" to own one of their franchises. We will always entertain a good opportunity so we agreed to meet with them and discuss details. What they said to us in person sounded OK so we asked to see it in writing (Step 1. Always get everything in writing). Once we had a chance to examine the agreement docs we were shocked! Upon much closer inspection, the agreement automatically rebuked itself within 6 months if the revenues were not going to top 1M within a first year projection. Aggressive... yes. Impossible... no. We go on.
They require you to take a minimum salary from your company even if your company cannot cover the salary. The difference is then rolled into a Series B loan payable interest free to the parent company. Historical track record sets them at about a 6% net which is then split 75% parent company and 25% Franchisee. Pretend you did create revenues of $1,000,000 in year one, your net profit is $60,000 and your minimum salary is $125,000 you will end up with a cash debt loan of $65,000. Your distribution is $15,000 and will take more than 4 years to pay back. That loan tops out at $50,000 then your salary option disappears until the salary loan is paid back in full. Your incentive wanes because now you can no longer collect a salary until the loan balance is paid, and you only have claim on $15,000 per year worth of equity disbursements. The harder you work, the further in debt you fall.
I closed the proposal at this point and suggested we use it as fire starter this winter but we continued to review the agreement. Next we found the voting and ownership rights of the company belong 100% to the franchisor and his flexibility, growth, strategy, etc. is given by corporate mandate. We report numbers and discuss metrics on a weekly basis with corporate but our 25% ownership is Series B and not series A. Only Series A has voting and decision rights for the franchise. Furthermore if we could not accomplish the goals within 6 months (which we have demonstrated cannot happen) there was automatic termination of the agreement with the full loan amount due and payable immediately.
So let's summarize. You work for 6 months, rack up $60,000 debt to pay back all of the "salary" you had received, AND you leave your $60,000 monthly billings under their company of which you have no say. You are booted out the door and corporate takes over your office and your billings.
Well... amen to that agreement. Amen to the "opportunity" and amen to my rant on protection vs aggression with franchise agreements.
Guys! Don't sign it without consulting a professional first. Have your CPA or attorney review the documents and run the numbers so that you have a clear picture of the offer. Your professional is worth double whatever he charges you because his professional opinion may save you hundreds of thousands of dollars in the end.