Finally you’re poised to become an official franchisee.
You’ve completed due diligence: researched potential firms, found a product that ‘fits’ with your interests, interviewed ten to15 other franchisees to hear the pros and cons. You’ve narrowed it down to the business you favour and it’s time to sign on. Then, the franchisor provides a copy of the franchise disclosure document and agreements.
Tip for franchisees: Whether you understand it or not, once you sign, you are legally obligated to uphold all the document’s provisions. Now is when you need to consult a lawyer. Too often they aren’t called in until there’s trouble, but with your buy-in fee at risk, it is well worth the extra cash for an expert’s oversight.
But not just any expert. Go to a specialist. Anyone looking to open a franchise should get professional advice either from an attorney or from a franchise firm that has some experience in the field. Your local general practitioner isn’t going to have a clue what they’re looking at. A franchise attorney knows what to look for, otherwise it’s a waste of time and money. You don’t want to pay them to learn.
Talk to My Lawyer
In case you’re still hesitant, here are ten good reasons to bite the bullet and invest in legal counsel.
1. Setting Up the Business Entity
For tax and liability purposes you have to establish a formal business. Whether you decide to operate as sole proprietorship, limited or general partnership, private entity, etc, the lawyer will work with your accountant to help you choose the arrangement that will best protect your home and personal assets from liability claims and ensure your proper percent of the profits.
2. Plain English
When you read it, you may not always get the details of the deal; the lawyer reads the documents and explains. Attorneys are familiar with the terminology, recognising standard conditions and clauses and alert to red flags when there are unusual demands or missing critical items. In evaluating the company’s track record, one warning sign is litigation history. Your lawyer will be wary of any past lawsuits or bankruptcy filings involving the firm or its principals.
3. Looking for Negotiables
The franchisor holds the cards; you are the franchisee and there’s not much leeway for discussion. With the playing field tilted in the franchisor’s favour, the lawyer’s job is to level it. Depending on the company’s leverage – how long they’ve been operating, the extent of their business and experience, how eager they are to expand – some franchisors may soften some of the terms.
While the monthly royalty and advertising fees you’ve assessed are probably set in stone, there might be room for concessions on time deadlines for your start-up date, ‘grand opening’ support and how much time you’re allowed to correct transgressions before they call a default.
4. Setting the Boundaries
The size and extent of the sales territory you are granted is critical to protect you from undue competition. The lawyer clarifies the extent of your dominion, determining the geographical area and demographics you’re granted for your outlet. How many kilometres is its radius?
Are the boundaries guaranteed? What exclusivity or protection is granted? Do you have the right to relocate if your lease expires or if your shop turns out to be in a bad business location?
The franchisor agrees to provide back-up support for your fledgling business and the lawyer helps spell that out answering questions such as: What kind of instruction will you get? How many days or weeks will it take? Will it occur at headquarters or close to your home?
If away, who pays travel? McDonald’s, for instance, requires nine months of on-site training.
Once you’re up and running, how much will the franchisor monitor your business? Does the company provide a free operations manual and how often is it updated? What restrictions specify details of remodeling, redecorating, obtaining supplies, uniforms or ‘trade dress’?
All franchisees are required to contribute to the advertising fund. This must be carefully worded regarding possible challenges to how ‘advertising’ is interpreted. Is it brochures? Flyers? Booklets? Media ads? Local or national? Who pays for the company website, is it supported by the firm or by the advertising royalties?
6. Disputes About Performance
Both you and the franchisor are expected to honour the letter of the arrangements between you, and clarifying default conditions is a critical element of protecting you if something goes wrong. What happens if one of you doesn’t perform up to par?
Failing to pay royalties or to uphold franchise standards are common areas of dispute. Are you expected, for example, to pay a minimum Management Service Fee each month whether or not you meet your required gross sales? Careful legal language is required to ensure your ability to cure a default.
7. Renewal and Termination
While you may be entering the franchise gung ho, the lawyer steps back and considers what happens if something goes wrong. Under what circumstances can either you or the franchisor end your relationship? Can you be dismissed if you fail to meet performance levels or if the franchisor merely decides to move from that location?
Can the franchisor cancel your agreement if you lose your lease? Are you planning to be able to renew when your current agreement expires? If so, are you required to remodel?
What rights might you have to sell or transfer your franchise location to someone else? Would the franchisor have a right to veto potential buyers? What about disabilities and death? If your franchise fails, will the franchisor be required to purchase your inventory and supplies?
If you terminate, will you be able to pursue other business opportunities without undue hardship? On the other hand, what provisions are there if you decide you want to expand to additional franchises?
A good franchise can help fulfil your dreams but you have to keep your eyes wide open – and two sets of eyes are better than one. Typically a franchisee has already identified a franchise concept and fallen in love. At that stage, it is very useful to have someone who is detached review the agreement and look at the system non-emotionally to be sure you understand the commitment you are facing.
8. Dotting the Is, Crossing the Ts
Once you’ve decided to go ahead and buy the business, the lawyer oversees the paperwork before you sign, preparing the asset or stock purchase agreement along with other documents that may be required.
9. Negotiating with Other Parties
In setting up a business, you’re apt to be hiring contractors, arranging deliveries with suppliers, employing staff. A lawyer helps work out the stipulations and clarifies responsibilities. For instance, when you’re leasing a business site, a lawyer may alert you to the required language that ensures you’re allowed to post signs and logos on the property.
10. Managing Dispute Avoidance and Conflict Resolution
Despite the care taken in drafting agreements, disputes do arise. Some common issues calling for litigation include lying about earnings, failure to provide ongoing training and support, terminating the franchise and enforcing post-term obligations.
In starting your search for a lawyer, word of mouth can be a very effective first step, so ask friends and colleagues for referrals. Then, do some research on the Internet. Besides legal firms specialising in franchise law, potential franchisees can also consult with search firms and brokers that specialise in matching up franchisors and franchisees. Additionally you can turn to FASA for a list of suppliers as well as some advice.