You have already made the decision to dive into the exciting world of franchising. Hopefully, you have spent some time educating yourself about this fast-paced industry, because you will have many things to consider both before and after you purchase a franchise. Of course, you can’t think of everything and that gap could imperil your financial future. Before you purchase a franchise, you should take five critically important steps. For more information, please read on, then contact one of our experienced franchise acquisition attorneys today. The steps you should take before purchasing a franchise include:
Exercise due diligence
Due diligence is all about evaluating your franchise investment before you pay a franchise fee and before you sign a franchise agreement. Considering that you are about to make an extensive and multi-year commitment to a new business, you should conduct an in-depth evaluation of both the franchisor and the potential franchise opportunity. Never assume that the franchise system is automatically profitable just because it has multiple units. Do your research.
Review the franchisor’s FDD with a qualified professional
The franchisor’s Franchise Disclosure Document (FDD) should contain the following legal disclosures:
- Information about the franchisor
- Information about the franchised business
- Estimated start-up costs
- Up-front and continuing fees
- A list of franchisees
- A table identifying the number of franchised units that have opened and closed
You need to consider the FDD as an important lifeline. As such, you should review it with one of our skilled franchise law attorneys who will weigh your expectations against what you can reasonably expect from the FDD.
Contact existing franchisees
Existing franchisees are a vital resource because they potentially represent your future. In particular, they can answer questions about:
- The franchisor support
- The profitability of the business
- Franchisor advertising initiatives
- What their approximate start-up costs were, and
- Their overall satisfaction with their investment decision.
Know that you can negotiate a franchise agreement
Contrary to popular belief, you can negotiate the terms of your franchise agreement, including:
- The scope of your protected territory and what the franchisor can and can’t do in your territory
- Potential grace periods as to the accrual of your royalty obligations, including when they begin to accrue
- Liquidated damages and limiting your liability if you terminate your franchise agreement due to poor performance
- Your right to renew your franchise rights
- Your right to transfer your franchise, including to family members for estate planning purposes
- Your ability to cure default claimed by the franchisor
- Potential rights of first refusal, allowing you to expand into new territories not yet sold by the franchisor
Be prepared to walk away
This process represents an opportunity for change and to improve yourself and your economic prospects. So, if an investment decision does not serve your best interests, even if you love a particular concept, you may need to walk away. Always be honest with yourself and pay attention to any red flags that pop up.
Our firm is here to help with all your franchise needs.
Contact Our Experienced Franchise Lawyer Today
If you have any franchising issues, contact Fortman Spann, LLC online today to schedule your initial consultation.