Franchise Buying Guide

Stick to the Path

Before You Sign on the Dotted Line
Presented by Guidant Financial
Guidant Financial specializes in helping entrepreneurs purchase new franchises using their retirement funds.

Once the franchisor has thoroughly checked out the applicant's qualifications, and the applicant has reviewed all the documents, seen an accountant and attorney, scraped together the money required to buy the franchise, and completed all the necessary discussions, it is time to close on the transaction.

Purchasing the franchise rights for a business that has not yet been built is not a complicated transaction, and the closing involves nothing more than signing a few contracts and sliding a check across the table for the initial franchise fee. Most "closings" for franchise sales do not take place in a room face-to-face with the franchisor. They take place through the mail. The company sends you a final package with tabs showing where your signature is needed and a cover letter starting the amount of the initial franchise fee. You sign and return, and it's done.

However, you should pay attention to the following before you sign on the dotted line:

  • The franchise agreement: This contract should have been in your hands with all blanks filled in for at least five business days before you sign and date it. That's a requirement imposed on the franchisor by state and federal law; it's not the franchisee's responsibility to see this is met. Make sure your attorney has reviewed the contract and signed off on it. If you've requested any changes to accommodate you, make sure they appear in the final form of the contract.

    Many companies ask you to sign two originals and return them to the company. The franchisor then executes the agreement and returns one original to you for your records.

  • Always date your signature: Begin the habit of adding a date to any legal document that contains your signature. If the form you're signing doesn't have a space to show the date, simply jot it immediately after your signature. Dates are important in the regulation of franchise sales, and you may be called upon to swear as to a series of dated events. The date of delivery of the UFOC, the date you first had a face-to-face meeting with the franchisor, the date on which you received a completed franchise agreement and the date on which you signed the franchise agreement are all important.

    Never backdate a document, even if asked to do so by the franchisor; it will only confuse your recollection of events. Make sure your document record is clear on the dates.

  • Other contracts: You may be presented with other contracts to sign that are ancillary to the franchise agreement. All such documents should be included in the UFOC and not come as a surprise at closing. If you do receive a surprise contract, check it with your attorney. Ancillary contracts may include a site selection agreement (if you don't have a site selected yet), an agreement regarding necessary lease terms and an acknowledgment of the training schedule.
  • UFOC: If you have not received the franchisor's UFOC at least 10 business days before you're asked to sign the franchise agreement, stop. Don't sign the contract; don't send any money. This could indicate a mere oversight, or it could mean you have a more serious problem. Contract your franchisor representative.
  • Lease paperwork: If you've selected a location for the franchised business, you probably have received a proposed lease from the landlord. Make sure your attorney sees this lease form and that you understand what requirements the franchisor might impose on the lease terms. It probably won't hold up the closing if this isn't resolved, but you want to give all parties--and their attorneys--as much notice as possible regarding the potential terms of any lease.
  • Bank paperwork: If you've arranged a loan from a bank or other lending institution, it'll want a copy of the franchise agreement (and every other piece of paper related to the franchise) as soon as possible. Talk to your banker about the steps necessary to provide the money you're borrowing, and when it'll be available. Make sure all is in order before you close.

Excerpted from Franchise & Business Opportunities: How to Find, Buy and Operate a Successful Business by Andrew A. Caffey

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This article was originally published in the January 2003 print edition of Entrepreneur with the headline: Stick to the Path.

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