10 Good Reasons Franchise Buyers Need A Lawyer
Finally you're poised to become an official franchisee.
You've completed due diligence: researched potential firms, found a product that "fits" with your interests, interviewed 10-15 other franchisees to hear the pros and cons. You've narrowed it down to the business you favor and it's time to sign on. Then, the franchisor provides a copy of the Franchise Disclosure Document and agreements. Omigod. It's several hundred pages of fine print.
By FCC regulations, the company's official disclosure contains 23 separate items meant to tell you everything you need to know about the firm--the history of the business, general condition of the marketplace, costs and earnings, initial and ongoing fees, startup costs, plus some states add their own specific conditions. "It's very thick. Like a novel," says Jania Bailey, President of Frannet, a franchise matchmaker firm.
Whether you understand it or not, once you sign, you are legally obligated to uphold all the document's provisions. Now is when you need to consult a lawyer. "Too often they aren't called in until there's trouble," cautions Nancy Lanard, a franchise attorney. And, as she agrees, with your buy-in fee at risk, it is well worth an extra $1,500-$4,000 for an expert's oversight.
But not just any expert. Go to a specialist. "Anyone looking to open a franchise should get professional advice either from an attorney or from a franchise firm that has some experience in the field," emphasizes Clarence Stanley, Director of Small Business Development at New York's Lehman College.
"Your local general practitioner isn't going to have a clue what they're looking at," Lanard warns. And Bailey backs her up her: "A franchise attorney knows what to look for, otherwise it's a waste of time and money. You don't want to pay them to learn."
In case you're still hesitant, here are 10 good reasons to bite the bullet and ante up for legal counsel.
1. Setting Up the Business Entity
For tax and liability purposes you have to have to establish a formal business. Whether you decide to operate as sole proprietorship, limited or general partnership, limited liability company (LLC), and S or C corporation, the lawyer will work with your accountant to help you choose the arrangement that will best protect your home and personal assets from liability claims and ensure your proper percent of the profits.
2. Plain English
"Even when they read it, they don't always get the details of the deal," explains Julie Lusthaus of Einbinder & Dunn who specializes in franchise clients. The lawyer reads the documents and explains. Attorneys are familiar with the terminology, recognizing standard conditions and clauses and alert to red flags when there are unusual demands or missing critical items. "If I see a particularly onerous item, for instance if a royalty was going to be 20 percent--that's out of the ordinary--I'd point that out," Bailey explains.
In evaluating the company's track record, one warning sign is litigation history. Your lawyer will be wary of any past lawsuits or bankruptcy filings involving the firm or its principals.
3. Looking For Negotiables
The franchisor holds the cards; you are the suppliant and there's not much leeway for discussion. With the playing field tilted in the franchisor's favor, the lawyer's job is to level it. Depending on the company's leverage--how long they've been operating, the extent of their business and experience, how eager they are to expand--some franchisors may soften some of the terms.
While the monthly royalty and advertising fees you're assessed are probably set in stone, there might be room for concessions on time deadlines for your start-up date, "grand opening" support and how much time you're allowed to correct transgressions before they call a default.
4. Setting The Boundaries
The size and extent of the sales territory you are granted is critical to protect you from undue competition. The lawyer clarifies the extent of your dominion, determining the geographical area and demographics you're granted for your outlet. How many miles is its radius? Are the boundaries guaranteed? What exclusivity or protection is granted? Do you have the right to relocate if your lease expires or if your shop turns out to be in a bad business location?
The franchisor agrees to provide backup support for your fledgling business and the lawyer helps spell that out answering questions such as: What kind of instruction will you get? How many days or weeks will it take? Will it occur at headquarters or close to your home? If away, who pays travel? McDonald's, for instance, requires nine months of on-site training.
Once you're up and running, how much will the franchisor monitor your business? Baskin-Robbins may send inspectors for a "white glove test" screening for crystallized ice cream or outdated product. Does the company provide a free Operations Manual and how often is it updated? What restrictions specify details of remodeling, redecorating, obtaining supplies, uniforms or "trade dress"?
All franchisees are required to contribute to the advertising fund. This must be carefully worded regarding possible challenges to how "advertising" is interpreted. Is it brochures? Flyers? Booklets? Media ads? Local or national? Who pays for the company website--is it supported by the firm or by the advertising royalties?
6. Disputes About Performance
Both you and the franchisor are expected to honor the letter of the arrangements between you, and clarifying default conditions is a critical element of protecting you if something goes wrong. What happens if one of you doesn't perform up to par?
Failing to pay royalties or to uphold franchise standards are common areas of dispute. Are you expected, for example, to pay a minimum Management Service Fee each month whether or not you meet your required gross sales? Careful legal language is required to ensure your ability to cure a default.
7. Renewal and Termination
While you may be entering the franchise gung ho, the lawyer steps back and considers what happens if something goes wrong. Under what circumstances can either you or the franchisor end your relationship? Can you be dismissed if you fail to meet performance levels or if the franchisor merely decides to move from that location? Can the franchisor cancel you if you lose your lease? Are you planning to be able to renew when your current agreement expires? If so, are you required to remodel? What rights might you have to sell or transfer your franchise location to someone else? Would the franchisor have a right to veto potential buyers? What about disabilities and death?
If your franchise fails, will the franchisor be required to purchase your inventory and supplies? If you terminate, will you be able to pursue other business opportunities without undue hardship? On the other hand, what provisions are there if you decide you want to expand to additional franchises?
"A good franchise can help fulfill your dreams," says franchise consultant Steve Beagelman. But Virginia franchise attorney Patrick Maslyn insists you have to keep your eyes wide open--and two sets of eyes are better than one. "Typically a franchisee has already identified a franchise concept and fallen in love," he says "At that stage, it is very useful to have someone who is detached review the agreement and look at the system non-emotionally to be sure you understand the commitment you are facing."
8. Dotting The I's And Crossing The T's
Once you've decided to go ahead and buy the business, the lawyer oversees the paperwork before you sign, preparing the asset or stock purchase agreement along with other documents that may be required: letter of intent, opinion of counsel, escrow agreements, promissory notes and non-compete agreements.
9. Negotiating With Other Parties
In setting up a business, you're apt to be hiring contractors, arranging deliveries with suppliers, employing staff. A lawyer helps work out the stipulations and clarifies responsibilities. For instance, when you're leasing a business site, a lawyer may alert you to require language that ensures you're allowed to post signs and logos on the property.
10. Managing Dispute Avoidance and Conflict Resolution
Despite the care taken in drafting agreements, franchises are ongoing relationships--and disputes do arise. Some common issues calling for litigation include lying about earnings, failing to provide ongoing training and support, terminating the franchise and enforcing post-term obligations.
In starting you're search for a lawyer, word of mouth can be a very effective first step, so ask friends and colleagues for referrals Then, do some research on the Internet. Besides legal firms specializing in franchise law, potential franchisees also can consult with search firms and brokers that specialize in matching up franchisors and franchisees. Additionally, Small Business Administration Development Centers in your area can offer advice and support services.