Franchising is a business model that companies use to expand their brand or system. If a company (the “franchisor”) is franchising to expand, it packages and sells its business concept – with varying degrees of support – to individuals (“the franchisees”). The franchisees, in turn, initiate the franchise business and pay a franchise fee and royalties to the franchisor. The franchisor will have detailed written disclosures and contracts it uses to engage franchisees who wish to buy into the system.
During and immediately following the Great Recession, many people have concluded that they want to own and run their own business. This stems, in part, from individuals who were formerly employees who wish to have more control over their future. The workplace became, and to some degree still is, unstable due to a variety of forces, some of which are cultural.
Buying a franchise is a life decision that involves a variety of important factors including, but not limited to, suitability, financial, and legal issues. The key legal issues in considering whether or not to buy a franchise include:
1. The “legal” and business reputation of the franchisor.
- How has the franchisor dealt with franchisees in legal disputes?
- Has the franchisor generally been compromise or combat oriented?
- Talk to and visit recent franchisees to inquire into their experience with the franchisor.
A good legal and business workup on the franchisor will reveal much, which is important in advance of paying a significant sum of $100,000 or more for a franchise.
2. Discover all the hidden costs, the franchisee’s finances and financial commitments, understand the market, and the competition in your local area.
- Is it a business which is easy or more difficult for others to enter?
- Conduct thorough due diligence of the franchise you are looking to purchase, so you’re able to make an informed business decision.
3. Know the franchise agreement.
- Your franchise agreement will have a big impact on whether or not your franchise succeeds.
- You should know how it’s drafted and whether it contains an exit opportunity.
- You should know the proper disclosures, any territorial restrictions, fees, and obligations you have as a franchisee.
- You should know what happens if there’s a breach of contract and your recourse for misrepresentations or failures on the part of the franchisor to provide support.
4. What happens to your franchise if the franchisor is acquired by another company?
- Can the acquiring company change the name of your business without your permission?
- Who pays for all of the costs and lost business traction that results from a name change?
5. Can you sell your franchise to a third party without undue restriction?
A franchise may be a good choice for some but not others. A thorough investigation will help you to sort through the issues and risks in relation to your own situation.