When buying a franchise, it is important to engage a reputable franchise law firm to conduct a franchise business review. This is your one chance to make sure you avoid mistakes that could put your franchise in jeopardy unnecessarily, and you cannot afford to overlook legal risks during the buying process.
There are numerous issues we examine when conducting franchise business reviews for our clients. However, if we break the review process down into its overarching components, there are seven key areas of consideration:
1. Disclosure Compliance and Adequacy
All franchisors must comply with the FTC’s Franchise Rule (which creates the requirement for the 23-Item Franchise Disclosure Document (FDD)), and many states have franchise disclosure laws that impose additional requirements. Not only do we review franchisors’ FDDs for legal compliance, but we also examine their disclosure documents for other issues as well.
2. Fees and Costs
Fees and costs are obviously important, but they are not always so obvious in the FDD and franchise agreement. We carefully scrutinize franchisors’ documents to ensure that our clients have a clear understanding of all of the fees and costs they will be required to pay.
3. Litigation, Bankruptcy, Trademark Claims and Other Legal Risks
If a franchisor is in litigation or facing bankruptcy, this could have drastic implications for its franchisees. The same is true if a competitor is contesting the franchisor’s claim of trademark ownership. We examine these legal risks, among others, to help our clients make informed buying decisions.
4. Purchasing Restrictions and Mandatory Suppliers
Purchasing restrictions and mandatory supplier requirements can have significant impacts on franchisees’ ability to succeed. Franchisors often use these as additional profit centers—even though they end up costing franchisees in many cases.
5. System Size and Growth
In general, consistent growth is a good sign, while a loss of franchisees should be viewed as a potential red flag. The disclosure tables in Item 20 (and their disclaimers) provide a wealth of information, but it isn’t always easy to interpret what they mean. We can help you assess whether your franchisor is on the way up, or whether it may be on the way out.
6. Competitiveness
How does your chosen franchisor’s offering compare to its competitors’ franchise programs? This is important for you to know, and comparing competing franchise systems requires both industry knowledge and access to the other franchisors’ FDDs.
7. Franchise Agreement Terms
Finally, when buying a franchise, you need to know what you are signing. Franchise agreements are long and complex, and they are often poorly drafted. We meticulously review our clients’ franchise agreements, we explain our clients’ risks, we offer suggested revisions, and we negotiate on behalf of our clients when desired.
Learn about Our Fixed-Fee Franchise Business Review Programs
Are you thinking about buying a franchise? If so, contact us to learn more about our four fixed-fee franchise business review program options. We represent prospective franchisees nationwide, so call 202-293-3947 or tell us how we can reach you online now.
