Finally you’re poised to become an official franchisee
You’ve completed due diligence: Researched potential firms, found a product that ‘fits’ with your interest, interviewed ten to 15 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 board. Then, the franchisor provides a copy of the franchise disclosure document and agreements.
Related: Your Staff are your Business
Whether you understand it or not, once you sign, you’re legally obliged to uphold all the document’s provisions. This 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’s 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 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, there 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 a sole proprietorship, limited or general partnership, 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.
Related: Travesting the Franchise Terrain
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 and a trip to its college in the US.
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 detail of remodelling, 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 in the event that something goes wrong. What happens if one of you doesn’t perform 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 the 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 you fulfil your dreams but you have to keep your eyes open wide – 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 unemotionally to be sure you understand the commitment you are making.
8. Dotting the I’s and crossing the T’s
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 bond to be hiring contractors, arranging deliveries with suppliers, employing staff and soon. 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. You can also turn to the Franchise Association of South Africa (FASA) for a list of suppliers and some advice.
Weird fine print
These are just some left-field contractual obligations dredged up from the Internet that will make you think twice about signing contracts without proper, expert consultation.
You know nothing John Snow
Game of Thrones actor, Kit Harrington, is contractually obliged to not bring scissors or dyes anywhere near his locks for the duration of his tenure with the TV franchise. The contract is so strict that he wore a wig while filming another movie which required a shorter do.
Forever, and never shall part
Scientology’s main man Tom Cruise signed a symbolic billion-year service contract to the church which dictates upon each reincarnation that he continues its purpose of spreading ethics on this planet and throughout the universe.
You’re stuck with that tenant
In France, a statutory law by the name of ‘viager’, meaning life tenant, is an ancient system of buying and selling apartments. It means that, as a purchaser or inheritor of a property with a life tenant, you’re unable to evict them. You’re stuck with them until death do you part.