Buying an existing franchise is a unique business opportunity that comes with unique legal considerations. It blends aspects of buying a new franchise with aspects of buying an independent business, and addressing the risks involved requires thorough due diligence combined with an in-depth understanding of the legal issues at play.
Here are six preliminary issues to consider if you are thinking about buying an existing franchise:
1. Conditions on Transfer
In order to sell (or “transfer”) a franchise, the existing franchisee and the prospective buyer must meet the requirements set forth in the existing franchise agreement. These requirements are typically structured as “conditions,” and franchisors almost universally reserve broad rights to approve and reject proposed transfers. Some typical transfer conditions include:
- Cure of any outstanding defaults under the franchise agreement;
- Franchisor approval of the prospective buyer;
- Updating to then-current system standards;
- Compliance a franchisor right of first refusal; and,
- Buyer execution of the franchisor’s then-current franchise agreement.
2. Negotiating the Franchise Agreement
In most cases, when you buy an existing franchise, you will be required to sign the franchisor’s then-current franchise agreement. It is critical to review the terms before signing, and you should not assume that the franchisor’s current terms are identical to those in the seller’s agreement. Franchisors routinely update their standard franchise agreements in order to adopt new franchisor-friendly protections, and there may be new or old provisions that you should try to negotiate.
3. Term and Renewal
Even if you are required to sign the franchisor’s then-current franchise agreement, the duration of your franchise may be limited to the remaining term and renewal period(s) under the seller’s agreement.
4. Assuming Other Contractual Rights and Obligations
In addition to signing the franchise agreement, in order to take over an existing franchise you will likely need to assume certain other contractual obligations as well. These may include real estate and equipment leases, supplier contracts, and agreements with service providers. Before committing to the transaction, it will be critical to ensure that (i) the existing franchisee has the right to assign the necessary agreements (or you can negotiate new arrangements, as necessary), and (ii) the terms of any contracts to be assumed will meet your needs.
5. Franchise Due Diligence
Regardless of whether you are purchasing a new or existing franchise, it is imperative to conduct thorough due diligence. This means talking to current and former franchisees (not just the seller), comparing competing franchise opportunities, reviewing the franchisor’s Franchise Disclosure Document (FDD), and much more. For some tips, you can read:
- 10 Key Considerations for Due Diligence in Purchasing a Franchise
- How to Gather Information from New and Existing Franchisees During Your Due Diligence
- What Does It Take to Become a Successful Franchisee?
6. Why Does the Franchisee Want to Sell?
Finally, why does the franchisee want to sell? If you are will be relying on any representations that you cannot independently verify, it will be important to include appropriate remedy provisions in your purchase agreement.
Speak with National Franchise Lawyer Jeffrey M. Goldstein
The attorneys at the Goldstein Law Firm have decades of experience representing new and existing franchisees in transactional and dispute resolution matters. If you are thinking about purchasing an existing franchise, you can call (202) 293-3947 or inquire online to schedule a free initial consultation.
