April 5, 2016
Purchasing a franchise is not only a large investment, but there are also several aspects of running a business that open you up to liability. Partner with experienced professionals throughout the process of buying and owning a franchise to ensure you are protected.
As an experienced franchise lawyer, I work with both franchisees and franchisors throughout the entire franchising process. In addition, I am also a part owner in a thriving new franchise. This gives me a comprehensive understanding of all aspects of franchising.
Here are my recommendations to protect yourself when purchasing a franchise.
Occasionally, I run into a prospective franchisee that is thinking of opting out of a formal review of the FDD by a franchise lawyer. Their reasoning hinges on the thinking that the franchise will not alter their terms, so why pay to have it reviewed.
While many of the material provisions are not negotiable, there are issues that can be modified. For example, if you are in a tight real estate market, you will want to build in margins into your timeline to be operational. One FDD I reviewed only gave the franchisee six months to get the business up and running before running into problems with the parent company. As a part owner in a franchise, and having helped franchisees in their journey, I know that may not be an adequate timeline. I negotiated a more realistic timeframe to protect the franchisee.
Additionally, it is never a good idea to agree to a deal that you don’t fully understand. The FDD is a comprehensive document in legalese. This is a complicated binding agreement that you are entering. You need to understand all the details and what certain clauses could mean for you down the road prior to signing on the bottom line. You don’t want to enter into a bad franchisee agreement solely because you have invested time and energy to get to this point.
To limit your personal exposure, purchase the franchise under a LLC or corporation. While you will need to personally guarantee franchise agreement and lease for a brick and mortar location, this protects you in other scenarios. Down the line, if a disgruntled employee or clientele decides to sue you, they can only go after the LLC or corporation as opposed to you personally.
When I review FDDs for clients, I also counsel my clients to establish the best business entity for their needs.
Most franchises will require specific insurances. These requirements are tailored to the specific industry and business model. As the owner of a business, you need to be current on your insurances at all time. If for some reason an insurances lapses and something happens, all of the damages will be out of your pocket.
Oftentimes, the franchisor will have recommended or even required insurance companies for you to work with. They have vetted the provider and are familiar with the quality of service a coverages.
If they do not give provider options, work with an insurance broker. They will evaluate different options to give you the best rate for the coverage you need.
If you have employees, use payroll services. There are many rules and regulations around payroll, dedications, and taxes. Failing to follow all the rules, regulations, and withholding the correct amount leave you open to trouble with the federal government and labor boards along with potential sizable penalties.
Reliable payroll services will make sure you are in good standing with both offices, submit quarterly filings, manage deductions, and withhold the correct amount.
While building in an exit strategy upfront doesn’t necessarily legally protect you, it does help protect your investment. During the course of growing your franchise, you will build up equity at your location and with your clientele.
You will leave the business at some point. This will either be due to retirement, pivoting away from the business, or you will no longer be able to meet the demands of running a business. You will want to recuperate not only your initial investment, but also benefit from work you did to build a thriving business.
While there are several components to a strong franchisee exit strategy, one of the most important for a brick and mortar business is securing the location for the future owner. This is managed in the lease terms.
A franchise lawyer can help you negotiate lease terms favorable to a long-term exit strategy when you sign the lease. Standard lease terms have phrasing such as, “options are personal to the tenant only.”
Inability to negotiate around that clause is a deal killer. What it does is stop you from transferring your lease terms to another individual, such as a future buyer. Think about it from a future buyer’s perspective. They can purchase the business but will have to move locations and hope the clientele follows.
In their mind, they lost the main value of the business and instead they are only purchasing equipment.
I help clients negotiate previsions to transfer the lease to a future owner, as well as ensure that the terms support a long-term strategy that maximizes your return on investment.
Come to the table with a team of experts assembled to protect your best interests throughout the process. This includes a franchise lawyer, CPA, and insurance provider.
There are countless high-caliber franchises out there. Like any product, there are also sub-par or even poor franchises. You want to insure that you are investing into a quality business model. This means making sure their financials and business structure are in order. Then you want to ensure that the agreement you sign is also in your best interest.
As an experienced franchise lawyer, I can help you throughout the process of purchasing your franchise. By partnering with me, you take advantage of years of franchising and real estate experience to help you build a strong legal foundation for your franchise.