Buying a franchise can offer great economic opportunities. A successful franchisee can achieve financial independence and a rewarding career.
But franchises also come with pitfalls. An experienced lawyer can help you avoid those pitfalls.
Why you need a lawyer to buy a franchise
Before you sign any documents, you should contact a lawyer who has experience working with franchises and preferably, with the specific franchise you are interested in.
Purchasing a franchise comes with a whole host of legal documents to review and sign. And with good reason. The initial investment to buy into a franchise is often hefty. The legal documents are meant to protect you and the franchisor. However, you’ll want a lawyer to review those documents to make sure your interests are protected.
Common franchise contract issues
There are typical topics included in most franchise agreements that you’ll want to discuss with your lawyer. Here are some examples:
Royalty payment structure – When you own a franchise, you often are required to pay royalties, sometimes monthly, back to the franchisor. You’ll want to be very clear about what these payments are and negotiate the rates up front if possible.
Right to close – Some franchisors won’t allow a franchisee to simple shut down the business if things are going well. There is often a term in the contract mandating the franchisee keep operating. You’ll want your lawyer to review the right to close terms in the contract and help you understand them.
Franchise territory – You’ll want to know and understand what your franchise territory is. A franchise territory is often set by a certain mile radius around your location, or based on city or county limits. Your lawyer will be able to advocate for you to make sure the territory outlined in your franchise contract is fair and reasonable.
Setting up a business entity
Before you purchase a franchise, you need to set up a business entity. An experienced franchise lawyer can review your options with you, including an LLC, S-Corp or C-Corp. Choosing the right business entity at the beginning will make a big difference as your business grows. Many franchisees co-own their business with family members. It is important to carefully consider this and to address it as part of your estate planning, whether it involves a will or a trust.
Buying a franchise is a BIG investment. The Franchise Disclosure Document (FDD) that every franchisor is required to provide often comes in at 200 pages. You’ll want an experienced lawyer to help you wade through the paperwork, alert you to any potential issues, and advocate on your behalf.