It is important to see your lawyer, along with other professionals (such as your accountant), before purchasing any type of business. However, the importance of obtaining legal advice becomes even greater when buying a franchise. A franchise is different from most other business purchase transactions in two important ways:
- How you run the franchise business is largely governed by the franchise agreement and you will be subject to ongoing commitments to the vendor (“the franchisor”) for the entire term of the franchise; and
- You are not buying assets and/or a customer list which, following settlement, become yours. You are simply being granted a licence to use the franchisor’s assets (i.e. their intellectual property). That licence is only as good as the franchise agreement under which it is granted and once the licence expires or is terminated your franchise/business will no longer exist.
It is, therefore, vital that you fully understand the franchise agreement – which can often be a lengthy and complex document dealing with many different legal concepts. Because of the wide variety of businesses operating under a franchise system, not all franchise agreements are the same. However, there are several common issues you should turn your mind to, including:
- Who is the franchisor? It is worthwhile doing due-diligence on the franchisor and the franchise itself. The less well known they are the more cautious you should be. A franchisor can only provide you with a licence to use intellectual property if they own it, or have the right to grant sub-licences under a master franchise agreement. Is the franchisor a member of any franchise associations?
- How long do you have? A franchise licence will often be granted for a set term with some agreements providing limited rights of renewal. The value of a franchise licence will depend greatly on the length of the term – as once the franchise licence expires your business will expire with it.
- Where is my franchise? Franchise licences are granted for specific locations (which should be well described or shown on a map).
- What am I paying for? What exactly are you being given a licence to use (e.g. systems, brand, software etc)? What training do you get? What are the franchisor’s obligations around marketing? Does the franchisor provide any other support or mentoring?
- Is it an exclusive licence? If the licence granted is non-exclusive the franchisor could grant further licences within your location – again lowering the value of the licence.
- How much am I paying for it? As well as the usual fees (e.g. the initial franchise fee; on-going service fees; marketing fees; renewal fees etc) there may also be less-obvious, but significant, costs contained within the franchise agreement (e.g. fitting out premises, training, conferences, software use, re-branding, upgrading systems, requirements to purchase from particular suppliers etc). Also, can the fees be reviewed and increased by the franchisor?
- Can I sell my franchise? Are you able to sell the franchise to another party? Is the franchisor’s consent needed? What are the conditions? Is a fee involved?
- Is there a restraint of trade? You will usually be prevented from acting in competition with the franchise business during the term of the franchise and for a specified period after it. If you intend to operate other businesses separate from the franchise (even if they are not in competition) you will need to look closely at such provisions.
- How easy is it for the franchise agreement to be terminated? If you have invested a lot of time and money into a franchise you need to make sure that a franchisor cannot terminate it without good reason and that there is time provided to remedy any breach.
The above is a small sample of the legal issues that surround most franchise agreements and franchises in general. Given the large and on-going influence a franchise agreement will have on any franchise business you purchase, it is essential that you gain sound legal advice before putting your signature on anything.