You’ve completed your due diligence by researching potential firms. You’ve interviewed several franchisees to ask your most burning questions and hear the pros and cons firsthand. You’ve finally narrowed the opportunities and found a franchise offering a product or service that “fits,” one you think you’ll have a reasonable chance of success with. You’ve paid a visit to the franchise headquarters and begun working on your business plan. In other words, you’re almost a franchise owner. What now?
Once you’re poised to become an official franchisee, the franchisor will provide a copy of the Franchise Disclosure Document and agreements. Containing 23 separate items, by FCC regulations, the company’s official disclosure tells you everything you’ll need to know about them — their business history, general marketplace condition, initial and ongoing fees, costs and earnings, startup costs, and any state-specific conditions. Whether you understand the Franchise Disclosure Document and the Franchise Agreement or not, once signed, you are legally obligated to uphold all of the provisions. At this point, you need to do everything you can to protect yourself legally, and you do that by hiring a franchise attorney.
In case you’re still hesitant, a franchise attorney can help you navigate every road on your franchise adventure, in addition to understanding your Franchise Disclosure Document. Here are three more reasons why it’s essential that you seek legal counsel.
1. Setting Up Your Business Entity
As a franchise owner, you have to establish a formal business entity, such as Sole Proprietorship, Limited or General Partnership, Limited Liability Corporation (LLC), Subchapter S Corporation, or S or C corporation, for tax and liability purposes. Your attorney will work with your accountant and offer suggestions for how to set your new franchise business up. He or she can also help you determine which business entity will ensure your proper percent of the profits while best protecting your home and personal assets from liability claims. Choosing the right business entity is crucial — it determines your legal rights and liabilities as a franchise owner, as well as how your business is taxed.
2. Negotiation Power
If a franchise development director tries to discourage you from hiring an attorney, claiming you’ll be wasting your money because nothing in the franchise agreement is negotiable, ignore them. Because you are the suppliant and the franchisor typically holds the cards, the playing field is tilted in their favor and there isn’t much leeway for discussion, but your lawyer’s job is to level it. While advertising fees and monthly royalties are probably set in stone, it’s possible concessions can be made regarding deadlines for your start-up date, negotiating your lease, support for your grand opening or default conditions. Additionally, your attorney can help work out stipulations and clarify responsibilities when hiring contractors, employing staff and arranging deliveries.
3. Renewal and Termination
When looking forward to becoming a new franchise owner, you’ll likely be gung-ho about jumping in with both feet, but a lawyer will step back and consider what can happen if something goes wrong. There are many questions about renewal and termination that your attorney can help you answer, such as:
- If you fail to meet performance levels or the franchisor moves from that location, can you be dismissed?
- Can they cancel you if you lose your lease?
- Can they require you to remodel?
- Do you want to be able to renew your current agreement when it expires?
- What are the circumstances under which either you or the franchisor can end your relationship?
- Do you have the right to sell or transfer your franchise location, and would the franchisor be able to veto potential buyers?
These are just some of the issues involved with renewing or terminating your franchise agreement. An attorney can also advise you about whether the franchisor will be required to purchase your inventory and supplies if the franchise fails or, on the other hand, what opportunities are available if you choose to expand to additional franchises.
Buying a franchise and becoming a business owner is an exciting journey. An attorney with experience in franchising law will help you navigate the terrain and create a successful business. We are franchise owners, too. We’ve walked this walk — learn from our experience. For more information about how to start on the right path, contact us at Shelton Law & Associates for a free initial consultation.