Buying a franchise is all about creating opportunity for yourself and building a business that, in time, will serve you and your family. As a franchisee, the business that you will be building will be dependent on the legal rights granted to you in the franchise agreement and the disclosures contained in the FDD. To maximize your chances for success, to avoid pitfalls and to protect franchise rights, you must engage in a due diligence process.
From a business perspective, your due diligence must involve the evaluation and validation of the franchisors business model, the support offered by the franchisor and the experiences of existing and former franchisees. From a legal perspective due diligence mandates a thorough review of the FDD and a franchise agreement, negotiations with the franchisor and franchise agreement amendments focused on preserving your franchise rights and ensuring that your business expectations match up with the legal rights, obligations and restrictions contained in your franchise agreement.
Franchise Agreements Are Negotiable
Before we get started in discussing the steps to buying a franchise, it is critical for you to understand and know that franchise agreements are negotiable. Much more often than not, every day franchise agreements are modified through an addendum process before a franchisee signs off on a franchise agreement.
Steps to Buying a Franchise
The steps to buying a franchise must be focused on business due diligence and legal due diligence. Business due diligence must be focused on your evaluation of the franchise opportunity, the industry, unit economics, your financial resources and the experiences of other franchisees. Legal due diligence must be focused on the FDD disclosures, the franchise agreement, franchise agreement negotiations and how your legal rights match up to your business expectations.
1. Understanding Your Expectations
The first step is for us to understand and learn about you, your franchise expectations and the franchise opportunity that you are considering. During our initial conference call we will discuss:
- Why you are interested in a particular franchise opportunity;
- Whether you are using your savings, 401K, or a loan to fund your franchise investment;
- Your current occupation and whether or not the franchise is intended to immediately replace your current employment;
- Whether or not the franchisor or the franchisor’s sales team have made representations to you;
- Whether or not other family members will be working with you in the franchised business;
- Whether or not you have attended a discovery day;
- Whether or not you have contacted existing and former franchisees; and
- Other factors and information important to you.
Our approach to the review of your FDD and franchise agreement and the eventual franchise agreement negotiations and modifications will greatly depend on who you are, your goals and your franchise expectations.
2. FDD and Franchise Agreement Legal Review and Assessment
Having gained an understanding of your expectations and what the franchise investment means to you, in step 2 we engage in a thorough and detailed review of the FDD and franchise agreement. Our review process includes preparation of a detailed written FDD and franchise agreement assessment, recommendations and proposed franchise agreement modifications. In our review and assessment we address issues that include:
- Red flags concerning certain disclosures contained in the FDD and from information that we believe may have been wrongfully omitted from the FDD;
- A section by section review of the FDD disclosure items;
- Assessment of the franchisor’s reported litigation history and reported trademark rights and interests;
- Review of legal factors related to initial franchise fees, on-going royalties and other mandated on-going contributions such as to brand development funds and designated marketing areas;
- Review of your territory rights, exclusions to those rights and factors that may be unique to the franchisor or the industry concerning protection of your territorial rights;
- Legal evaluation of the franchisor’s Item 19 financial performance representation or the fact that the franchisor elected to not include a financial performance representation;
- Evaluation of legal issues concerning your ability to transfer the franchise to your spouse and family in cases of estate planning and succession;
- Your right to renew your franchise and, potentially, to acquire additional adjoining territories; and
- Many other issues involving your rights and obligations as a franchise.
To learn more about our FDD and Franchise Agreement Review, click here.
3. Preparation of Proposed Addendum to Franchise Agreement
Upon completion of our FDD and franchise agreement review and assessment we prepare a proposed addendum to the franchise agreement. This “addendum” is a two to five page document that we prepare as a proposed supplement to the franchise agreement. Within the addendum we address legal issues that we believe may be successfully negotiated. This addendum is not finalized until you review our FDD and franchise agreement assessment and we speak about proposed modifications that you would like to make to the franchise agreement. Issues that are commonly addressed in our franchise agreement addendums, commonly include:
- Limiting your individual liability for the payment of future royalties and other forms of liquidated damages;
- Enhancing your right to cure defaults and preserve your rights as a franchisee;
- Enhancing protections involving your operating territory and potentially acquiring options or rights in adjoining territories;
- Creating rights allowing you to transfer your franchise to family members for estate planning and succession purposes;
- Extending timelines by which you are required to have the franchised business established and in full operation;
- Clarifying your rights respecting financial terms such as royalties and other on-going fees;
- Modifying the terms of restrictive covenants and non-competes if there is a conflict with your existing business or occupation; and
- Other rights that relate specifically to you and the reasons for your franchise investment.
4. Planning and Strategy Session
Once you have had an opportunity to review our written FDD and franchise agreement review and our proposed franchise agreement addendum we will schedule a call or number of calls to discuss everything. During this process we will be working together to identify additional items that may be important or unique to you and to finalize a strategy for how we will approach negotiations with the franchisor and the final addendum that we will present to the franchisor.
5. Franchisor Negotiations
How we approach franchisor negotiations has a lot to do with the particular franchisor, you and the relationship that you have had with the franchisor’s sales team. Depending on what is right for you and your situation, we may approach the negotiation process directly where we exclusively deal with the franchisor or your behalf or where we work together in joint communications with the franchisor. Either way though, we guide you through the entire process ad the center-point for the negotiating process is the proposed franchise agreement addendum that we prepared.
6. Franchise Closing or Conclusion
If everything goes well and negotiations reach a result that is acceptable then the next step is to proceed with your franchise closing which will involve your signing of the franchise agreement, our franchise agreement addendum and other exhibits to the franchise agreement. We guide you through the entire process and review it every step of the way. Keep in mind and consider that sometimes a good franchise decision may be to walk away and not proceed with a franchise investment. There are many reasons why proceeding may not be right for you and if they occur we will be sure to candidly discuss your concerns and give our input. For us, successfully representing our clients also includes franchise transactions where, sometimes, they need to walk away.
Post Closing Support
If you ask our existing client, we are here for your long term success. If you ever have any questions about your franchise transaction, always know we are here for you. Many of our clients continue to work with us after their franchise closing in a number of additional transactions including lease agreements, establishing additional franchise units and other business matters.