If you are considering buying a franchise, you should beware of boilerplate disclaimers. They come in many forms. Some are buried in the fine print near the back of a thirty-page franchise agreement. Many are duplicated in a separate document back near the receipt in the FDD.
Buying a Franchise
It was inevitable. The franchise sales engines have been spewing speculative claims about what we might call “pandemic opportunities”. The story is that many restaurants (estimates range from 3% to 50%) will close permanently because of the pandemic and the corresponding recession.
Finding oneself unemployed during 2020’s combined recession and pandemic and watching your savings get rapidly depleted, it is normal to start looking for alternatives to replace your income.
When you launched your business and set up a limited liability company, you probably signed an operating agreement. Your operating agreement is essentially an agreement among the owners about how the business will be operated.
Franchisors require virtually every person who buys a franchise to sign a personal guarantee, even if they plan to operate the franchise through a through a corporation or limited liability company. You should think twice (or more) before signing a personal guarantee.
Do you wonder whether there is value in hiring a franchisee attorney to review your Franchise Disclosure Document (FDD) before you commit to buying a franchise? Every prospective franchise asks that question. The question is legitimate. The answer is a resounding “yes”. A few hundred dollars invested today can literally save you and your family from personal bankruptcy.
When buying a franchise, you should beware of “freedom of contract”. Freedom of contract is a bedrock concept of the legal system. It presumes that every person understands every word of every contract and that their “self-interest” will cause them to not sign unfair or ill-advised contracts.
Another day and two more prospective clients calling for help because they bought franchises. One in the senior health care industry; one in the men’s hair care industry. Both suffered devastating losses. In under two years, one lost $600,000; the other “only” $100,000. In both cases, they have nothing left and I had to talk to them about consulting a bankruptcy attorney.
Every day people eager to own a business invest $500,000 to a million dollars in franchises where the FDD said the top of the range for “estimated initial investment” was under $250,000-and where the “initial franchise fee” is only about $35,000. When buying a franchise, the first question they should be asking is what are they getting for all that money?