Hiring an experienced franchise lawyer to conduct a franchise business review gives you an opportunity to ensure that you are making an informed decision about your investment. While you certainly aren’t required to hire a franchise lawyer to review your franchise opportunity, there are several important reasons to do so.
We discuss four of these reasons on our Franchise Business Reviews page, where you can also learn about the different types of flat-fee review programs we offer. These reasons are:
- Buying a franchise is a major, long-term investment.
- The franchisor is putting its best foot forward.
- The franchise agreement might not say what you think it says.
- You may need to negotiate the franchise agreement.
Why else should you consider hiring an experienced franchise lawyer to review your franchise opportunity before you commit to moving forward? Here are four more reasons why all prospective franchisees need a franchise business review:
Reason #1: You Need to Be Aware of Any Legal Red Flags
When buying a franchise, you need to be aware of any legal red flags in the Franchise Disclosure Document (FDD) or franchise agreement. Unless you have a background in franchise law, these are not issues that you will be able to identify yourself. While many—and perhaps even most—of these issues are simply data points that you will need to factor into your decision-making, serious issues may warrant considering a different franchise opportunity on their own.
An experienced franchise lawyer will review the FDD and franchise agreement with a focus on identifying issues that could lead to problems down the line. This will include (but not be limited to) focusing on questions such as:
- What happens if you don’t open your franchise on time?
- What are the conditions for transfer?
- What are the conditions for renewal?
- What opportunity will you have to cure (or dispute) a default under your franchise agreement?
- What liability will you face if the franchisor terminates your franchise agreement for cause?
- What options will you have if you need to hold the franchisor accountable?
- Does the franchisor have a history of suing its franchisees?
- Is the franchisor at risk of insolvency?
These are all questions that you will need to have answered in order to make an informed buying decision. In particular, if you could be at risk of losing your franchise due to factors beyond your control (i.e., if your franchisor has discretion over renewal), or if you could face substantial liability in the event that your franchise is unsuccessful (i.e., if your franchisor has a right to liquidated damages), these are important facts that you need to know.
Reason #2: You Will Want to Make Sure the Franchisor’s Offering is Competitive
When buying a franchise, it is also important to know whether the franchisor’s offering is competitive. If it isn’t, even if you have a particular affinity for the franchisor’s brand, you may be better off considering other opportunities. When assessing the competitiveness of a franchise offering, it is important to consider factors including (but not limited to):
- Financial terms (i.e., initial franchise fee, royalty fee and marketing fund contribution)
- Legal terms (i.e., conditions for transfer and renewal, breach, termination, and dispute resolution)
- Mandatory purchase (or supplier) requirements and other operational controls
- System size, growth, geographic coverage and stability
While there are some broad industry standards in franchising, many niches within the franchise industry have developed their own standards as well. An experienced franchise lawyer will be able to offer insight into whether the franchise you are considering is broadly in line with the relevant standards or whether you may be able to obtain more favorable financial or legal terms elsewhere.
Reason #3: The Costs of Ownership Could Rise Unexpectedly
One of the most common issues franchisees face during their ownership tenure is an unexpected increase in their capital expenditures or monthly costs. Not only do many franchisors’ FDDs underestimate the costs of opening for business and the reserves needed for the first six to nine months of operations, but most franchise agreements allow franchisors to impose additional financial requirements over time. These include both additional capital investments (i.e., purchasing new POS systems or paying for the costs of a rebrand) and additional monthly costs (i.e., complying with new system standards or purchasing from new (and more expensive) designated suppliers).
Even if these aren’t costs that you can control, you still need to be prepared for them. If you aren’t, you could suddenly find that operating your franchise is no longer sustainable. An experienced franchise lawyer will be able to identify these types of risks so that you can factor them into your decision-making.
Reason #4: You Need to Know What to Expect if Things Don’t Go According to Plan
Finally, and perhaps most importantly, you need to know what to expect if things don’t go according to plan. Hopefully things will go according to plan, and hopefully you will have a positive and profitable relationship with your franchisor.
But, with any franchise opportunity, there is a chance that this won’t be the case. This is just the nature of franchise ownership. From lack of financial success to disagreements over the enforcement of system standards, there are several things that can potentially go wrong. An experienced franchise lawyer will be able to determine what rights you (and your franchisor) will have in this scenario, and this is additional information that you will be able to use to decide if you are truly prepared to move forward.
Discuss Your Franchise Opportunity with Experienced Franchise Lawyer Jeffrey M. Goldstein
If you are considering a franchise opportunity, we encourage you to contact us to learn more about our fixed-fee franchise business review programs. Franchise lawyer Jeffrey M. Goldstein will be happy to discuss your options and help you decide which option makes the most sense for you. To arrange a free initial consultation, please call 202-293-3947 or contact us online today.
