Hire a Franchise Lawyer Before You Buy a Franchise
For a first-timer franchise investor on the verge of buying a franchise, there's no more critical a period than the days before signing the contracts and paying that initial franchise fee. You're justifiably excited, daydreaming about the adventure ahead, and don't want to slog through a bunch of boring financial details and legal mumbo-jumbo before starting your new business!
At this stage, poring through a 200-plus page Franchise Disclosure Document (FDD) stamped with contact information for the Federal Trade Commission is an intimidating and mind-numbing proposition -- and franchisors know it. Rather than examine the fine print to make sure you totally understand the details of the contract you're about to enter, you may ignore this critical documentation and assume that everything is fine, or choose to rely on the franchisor’s own description of the contents of these agreements.
If you're no franchise expert, the right move at this stage is to hire an experienced attorney who is well-versed in franchise law, to guide you through the FDD, point out any red flags, and help you negotiate any changes to the franchise agreement BEFORE you buy into the franchise.
What Can a Franchise Lawyer Do for You?
An experienced franchise attorney will be able to help you understand and make better use of the mandatory disclosures contained in the FDD, and help you seek reasonable concessions in the franchise agreement. Generally, an experienced franchise lawyer should be able to assist you with the following:
- Obtaining and analyzing comparative financial and qualitative data for the franchisor’s competitors.
- Making sense of, analyzing and extrapolating from the mandatory disclosures contained in the FDD.
- Developing questions to ask the franchisor’s representatives and current and former franchisees during the due diligence process.
- Identifying troubling provisions in the franchise agreement and spotting omissions that limit franchisees’ rights, and then proposing and negotiating changes to the franchise agreement.
In relation to these tasks, an experienced franchise lawyer will be able to assist you through his or her general knowledge of the franchise industry and familiarity with the FDD disclosure requirements. An unusually vague disclosure may prompt further inquiry. Litigation disclosures may raise red flags. Limited support provisions may suggest an inexperienced or inattentive franchisor.
Similarly, an experienced franchise lawyer will know what provisions in the franchise agreement franchisors generally are and are not willing to negotiate. Sure, a royalty reduction would be nice. But if you are a first-time franchisee is a system with hundreds of units that regularly receives new franchise applications, seeking such a concession is probably just a waste of time. Plus, are you sure you want to signal to the franchisor that you are concerned about your ability to pay its fees? If you are concerned about the fees, are you sure this is really the best franchise system for you?
In addition, an experienced franchise lawyer will be able to spot areas where the franchise agreement is unduly one-sided (all franchise agreements are one- sided, but some take it further than others), or where it omits provisions that provide reasonable protections for franchisees that may also be no-harm propositions for the franchisor.
Not as Expensive as You Might Think
Many franchise lawyers work as sole practitioners or in smaller boutique law firms and charge much lower rates than their counterparts at the big-time firms. In addition, many franchise lawyers offer flat-fee service packages, particularly for FDD and franchise agreement reviews. When put in the perspective of the total overall initial investment to purchase a franchise (which, even in the best of circumstances, is a speculative venture with significant risks entailed), the cost to hire an attorney to review the documents and suggest revisions to the franchise agreement that can help protect that investment and limit your exposure to liability is money well spent.
Jeff Fabian is the owner of Fabian, LLC, a boutique intellectual property and business law firm serving new and established franchisors and franchisees.
This article is provided for informational purposes only, and does not constitute legal advice. Always consult an attorney before taking any action that may affect your legal rights or liabilities.
A Checklist for Franchising your Business
We thought it might be useful to break the process down into a to-do list for the prospective franchisor. This isn't meant to be an all-inclusive guide by any means, but the list below should give you a solid idea of what lies ahead.
Getting Out: Important Points for Selling a Franchise
In either case, the franchisee’s right to sell the franchise will be governed by the transfer provisions in their franchise agreement.
Beware of Franchise Scams
A franchise is only as good as its brand name, which eventually determines the performance and success of other franchisees within the system. Aside from happy franchisees and a strong brand, another indicator of a strong franchise is one that utilizes a broad recruitment process, which at some point replaces the selling process so only the best prospects gain entry into the system.