When buying an existing franchised business, the process can involve a number of franchise and non-franchise legal issues. Here is an overview of some of the key issues to consider when evaluating a potential purchase of an existing franchise:
Franchisors like control. One of the ways they exercise this control (among many, many others) is by placing conditions on franchisees’ ability to transfer their franchise rights. When communicating with your prospective seller, it will be important to gain a clear understanding of where he or she is in the process of obtaining approval for the transfer. As a prospective buyer, you will likely need to go through the franchisor’s approval process for new franchisees as well, and you should make sure you understand the requirements and timelines involved.
Remaining Term and Renewal Rights
All franchise agreements are time-limited. The length of time a franchisee is granted the right to operate is known as the franchise “term.” Before buying an existing franchise, you should make sure you know the amount of time remaining in the term, and you should factor this into your financial calculations.
Likewise, most franchise agreements include “rights” to renew. If the seller’s franchise agreement includes a renewal provision (or if the seller is currently operating in a renewal term), you will want to make sure you have a clear understanding of your rights and obligations with regard to renewal. However, as we discuss below, you will also need to understand whether you will be required to assume the seller’s franchise agreement or sign the franchisor’s new standard form contract.
Lease Transfer, Term and Renewal
One of the most significant non-franchise aspects of buying an existing franchised business has to do with the lease for the business’s premises. Leases, like franchise agreements, are complex (and often archaic) legal documents that tend to be heavily one-sided in favor of the lessor. When seeking to transfer a lease in connection with the purchase of an existing franchise, many of the same issues that come up with regard to the franchise agreement apply: What are the conditions and approval requirements for transfer? How much time is remaining in the term (and does this match with the remaining term of the franchise agreement)? Will you be able to renew the lease if you decide to renew your franchise agreement?
When it comes to the franchise agreement that will apply to your business, there are two options:
- The franchisor will require you to assume the seller’s existing franchise agreement; or,
- The franchisor will require you to sign its “then-current” franchise agreement template.
In either case, it is critical to review the terms of the agreement that will apply. Franchise agreements contain numerous pitfalls for franchisees, and you will need to make sure that you go into the relationship eyes wide open to the potential risks and limitations involved.
Schedule a Consultation with Franchise Lawyer Jeffrey M. Goldstein
If you are thinking about buying an existing franchise and would like more information about the legal issues and risks involved, we encourage you to contact us for a free consultation. With offices in Washington D.C., we represent new and existing franchisees nationwide. To speak with franchise lawyer Jeffrey M. Goldstein in confidence, please call (202) 293-3947 or tell us how we can help online today.