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Why you need to obtain legal advice when buying a franchise

Why you need to obtain legal advice when buying a franchise

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Purchasing a franchise is not something that should be done on a whim. Here’s how to ensure that all the legal grounds in setting up the franchise are covered.

After conducting research and due diligence and finding a suitable franchise firm, what comes next is the purchase decision.  

But before making it official, franchisees must ensure the legality of the business. Engage a lawyer and seek their legal advice for the below considerations.

Setting up shop

In order to establish the business and make it formal, franchisees need to account for any tax and liability considerations. Another crucial business decision is whether to operate as a sole proprietor, limited or general partnership, limited liability company (LLC), or as an S or C corporation.  

Engage a lawyer to help select the arrangement that best protects  personal assets from liability claims.

Simple language

Lawyers are familiar with the terminologies, standard conditions and clauses in franchising agreements and other documents. They can help to determine all possible loopholes in the franchising agreement.

Having a lawyer will help in the inspection of the franchisor’s legal history. It is important for franchisees to be aware of the prospective franchisor’s litigation history to make an informed decision regarding the franchise purchase plan.

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Negotiables

Before signing the franchising agreement and making the purchase, franchisees must be able to maximise on certain negotiables with their franchisor.

A lawyer can help franchisees arrive at a beneficial agreement with their franchisors on the following terms:

  • Supplier terms
  • Product terms
  • Terms allowing the franchisor to unilaterally make contract amendments
  • Terms allowing the franchisor a degree of control over the franchisee’s cash flow
  • Terms allowing the franchisor to compete against the franchisee
  • Terms that give the franchisor security over the franchisee’s personal assets

Bear in mind that these terms could possibly give rise to business risks. Lawyers can look into all of these terms and give sound advice on the best course of action to take  to maximise benefits and legal security.

Setting boundaries

Franchisees should be clear with their operational boundaries since it is critical to the success of the business. This helps franchisees reduce if not avoid undue competition.

Having a lawyer will help franchisees in determining the business’ dominion over  geographical location and demographics. The lawyer will also inform the franchisee of the exclusivity and/or protection grants which they could receive from the franchisor as mandated by relevant legislation.

Setting boundaries to the location helps franchisees answer questions over their right to relocate upon lease expiration and other similar concerns.

Training and support

Training and support considerations need to be clarified with a lawyer, which may include:

  • The kind of instruction and/or training the franchisees and their employees will get.
  • The length of the training.
  • The duration and depth of the operational support.
  • Location of the training: Is the headquarters or close to the franchise unit’s address? If somewhere else, who pays?

Clarifying these things with the franchisor will save time, money, and resources on the part of the franchisee.

Performance issues

Both the franchisor and the franchisee are required by law to uphold the stipulations in the franchising agreement.

However, if a franchisee is experiencing difficulties performing these obligations, sound legal advice from a lawyer is necessary to prevent franchisees from sinking further into legal liabilities due to breaching the terms of the franchise contract.

Contract renewal and termination

When something goes wrong, the franchisee’s lawyer will be tasked to consider what steps to take. This is enables franchisees to prepare for circumstances which may lead to termination of the contract with the franchisor.

On the other hand, if everything is satisfactory and the franchisee wishes to renew the contract, a lawyer will be helpful in  determining, what terms will be retained and which would be removed.

Franchisees should ask their lawyers the following:

  • Possible dismissal, if there is an inability to meet performance standards
  • Remodelling
  • Selling/relocation rights
  • Vetoing potential buyers on the part of the franchisor
  • Inventory and supplies purchase in case of franchise failure
  • Avoid legal repercussions in the event of termination
  • Legal provisions to be considered in the event of franchise expansion

Learn more about opening a franchise.

Tying up loose ends

After taking into account the above considerations, the franchisee is ready to make that franchise purchase. Consulting a lawyer can help franchisees in paperwork review before signing.

Lawyers will also be tasked to prepare the asset/stock purchase agreement along with other relevant papers required. These documents may including the following: letter of intent, counsel opinion, escrow account agreements, promissory note stipulations, and non-compete agreement structures.

All these require the advice and legal services to be able to make a proper decision.

 

Why you need to obtain legal advice when buying a franchise
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