Buying a Franchise?

You have decided to purchase a franchise. What should you do next? First read the UFOC which has been provided to you. This document contains important information that will tell you a great deal about the investment you will be making, anticipated costs, the background and the financial strength of the franchisor, among others.

The next advice I give my clients is to contact current and former franchisees of the system. Ask lots of questions, including ones to help you determine the strengths and weaknesses of the franchisor. This is one of the best methods of due diligence you can perform.

The third step is to review with an experienced business accountant the audited financials of the franchisor contained in the UFOC. You should ask him or her to determine if the franchisor is sufficiently financially sound to support the system. Additionally, he or she should evaluate if this business appears to provide an opportunity for you to accomplish your financial goals.

Lastly you should consult with an experienced franchise attorney. Our firm provides the experience to advise you on making this substantial investment. Our advice includes counseling on the risks and advantages of the franchise, advising on forming the proper legal entity to run your franchised business, and reviewing and negotiating the lease for your business location .

We start with determining if you should acquire a franchise. Our review of the documents  begins with a review of the UFOC to gain an understanding of the franchise and the franchisor. I review the 23 items, paying particular attention to the first few items which provide a great deal of information about the company. Additionally, I check the status of the trademark(s) to make sure they are federally registered trademarks. After all, when you are buying a franchised business, you are acquiring a business that operates under a trademark. It is important to be sure that the trademark is federally protected.

My analysis continues with a thorough review of the franchise agreement. While reviewing the agreement I make note of obligations (financial, reporting and others) that the franchisee will have to the franchisor. Although some agreements are not negotiable, some agreements are. Therefore, I suggest revisions to the agreement which would make the document fairer to the franchisee. Some of the modifications involve providing a standard of reasonableness when franchisor approval is required, providing more notice prior to the franchisor’s exercise of its remedies upon default, insuring that any required indemnification by the franchisee to the franchisor is limited, and requiring that the franchisor provide indemnification to the franchisee for any trademark infringement actions or claims. These are just a sampling of some of the modifications that can often be negotiated with the franchisor.

Once the franchise agreement is reviewed and negotiations are completed, the franchise attorney should discuss the type of legal entity  under which the franchisee should operate the franchised business. In conjunction with the franchisee’s accountant, a decision should be made whether the business should be an S-corporation or a limited liability company.

The last piece in representing a franchisee is reviewing and negotiating the retail shopping center lease. Often franchises are retail businesses. Reviewing the leases for the retail location requires an expertise. As a firm that dedicates approximately 50% of our practice to franchise law, we handle a great deal of commercial shopping center leases. These documents are highly negotiable, from the business terms, to the legal nuances. Our experienced attorneys  know the many legal issues and types of business terms that the less experienced attorney, general practitioner and the real estate broker won’t know to negotiate. In addition, we have found that any review performed by the franchisor is not a substitute for an independent legal review.

It is clear that even when a franchise agreement is not negotiable, it is important to retain experienced franchise counsel to assist you with this process. You are undertaking a large financial obligation and it is extremely important to know that someone is on your team putting you in the best possible legal position in which you can be. I will look forward to being your teammate.

Contact the Law Offices of Nancy L. Lanard, P.C.