Important Things To Consider About Franchise Agreements
Buying a franchise is a huge investment, one that can have a considerable impact on your financial future. As such, it is an investment that needs careful consideration and the help of experienced advisers. It is almost always a far bigger decision than franchise sales people and the disclosure document would lead you to believe. In most cases, everything you own is “on the line.”
At the Bundy Law Firm, we consult with people who are considering investing in a franchise. This involves determining the clients’ background, objectives and expectations, and evaluating the franchise contract and other documents. Before you sign any documents or write a check, it is important that you consult with an experienced franchise attorney.
Call us today at 425-296-3411. Buying a franchise could be the best investment you ever make, but it is not something you should enter into without doing due diligence.
What Should You Look For In The Franchise Agreement?
Before you sign a franchise agreement, there are things you need to look for or be aware of
- The franchise disclosure document (FDD). The franchisor must deliver a FDD to you at least 14 days before you sign the agreement or make a payment. This document is lengthy and is broken down into 23 sections called items. The items describe the franchisor, the nature of the business, the relationship between the parties, information about the principals of the franchisor, an estimate of your expenses, the amount of your investment, the legal status of the trademark, contact information for current franchisees and should clearly delineate the duties of both the franchisor and the franchisee. It is a large document, often more than 100 pages. We will help you pierce through the legalese and understand what you are signing up for.
- Amount of total investment. The FDD should tell you the amount of your total investment, but this number is probably not complete and does not include expenses such as the true cost of the lease and equipment. We will help you dig through the numbers and understand what the real numbers are.
- Minimum royalties. Many franchise agreements require you to meet a certain quota of sales or to otherwise pay a minimum (or fixed) royalty for the entire franchise term. We will help you understand how that can put you in breach of your agreement, without any wrongdoing on your part, how the franchisor could possibly manipulate your success or failure by decreasing your effective market area, or otherwise.
- Personal guarantee. The documents may not explain the consequences of a personal guarantee. We will help you understand the consequences if you or a friend or relative sign a personal guarantee, and how that affects your overall risk.
- Operations manual. Most franchise agreements incorporate an operations manual that you may not see until after you sign. Most of these manuals give the franchisor the unilateral right to change the rules. We will help you understand the relationship between the documents and the impact that could have on your risk analysis.
- Renewal. What is the meaning of renewal in the agreement? There are few franchise agreements that allow a franchisee to renew under the same agreement. Most renewals raise the fees, require an additional investment or impose other new requirements on the franchisee. Although occasionally, we have been able to negotiate renewal terms that do not change the contract in certain ways, in most cases we will just help you understand and plan for the magnitude of change at the end of the initial term.
- The Combo Deal. Many franchises include several problematic terms in the same agreement. We will help you to spot these potential disasters for your family. For example, if you have a small territory (or none), you are required to sign a personal guarantee, you must pay minimum royalties, and you have no means of terminating or otherwise getting out of the agreement, that “combo” can force you and your family (and any friends or family who signed with you) into personal bankruptcy. There are lots of business opportunities available. We try to help you make decisions that do not require you to bear unreasonable personal financial risk.
Before you sign any agreement, consult with a lawyer. The above is only a limited number of the many things you should be aware of before investing in a franchise. No matter where you are located throughout the nation, the Bundy Law Firm will guide you through the documents item by item. We will make sure you understand every obligation and duty you and the franchisor have and all of the possible pitfalls. We try to give you the tools you need to make a good franchise purchase decision.