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Before you buy a franchise, the franchisor is legally required to provide you with a copy of its Franchise Disclosure Document (FDD) and franchise agreement. Federal regulations require franchisors to deliver these documents at least 14 calendar days prior to entering into a franchise relationship. This “cooling off” period is designed to give prospective franchisees sufficient time to weight their options without being pressured by the franchisor, as well as to review the FDD and franchise agreement in detail. When reviewing the FDD, most prospective franchisees hit the highlights: the Initial Franchise Fee, the royalty rate, the estimated initial investment and maybe the description of the protected territory. Few digest the FDD in its entirety, and fewer still take the time to wade through the dense legalese of the franchise agreement. 5 Key Issues to Review in the FDD and Franchise Agreement But, when buying a franchise, you need to gather as much information as possible, and you need to make sure you have a clear understanding of your legal rights and responsibilities. You also need to make an informed decision about negotiating certain provisions of the franchise agreement. If you overlook these provisions of the FDD and franchise agreement, among others, you may find yourself facing unexpected (and unhappy) surprises down the line: Franchisor Personnel Experience – Do the franchisor’s key personnel have experience running the type of business you will operate as a franchisee? Do they also have significant experience working for franchisors? Both of these are important, […]

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Despite the legal and financial risks involved, buying a franchise can be a profitable investment. With thorough research and planning, consistent effort, and some good luck, it is certainly possible to succeed as a franchisee. While we typically focus on the risks involved with franchise ownership on our blog (we are franchise lawyers, after all), the potential benefits of owning a franchise deserve acknowledgement as well. Under the right circumstances, here are seven potential benefits of franchise ownership: 1. Recognizable Brand Gaining access to a recognizable brand is one of the primary reasons why people choose to buy a franchise instead of starting an independent business. Opening your business under a name that is already well-known and respected can jumpstart your path to profitability. 2. Tested Business System Buying a franchise can afford access to a business system that has been tested and proven not just by the franchisor, but potentially by hundreds or thousands of franchisees across the country and around the world. Instead of spending the time (and money) to figure out what works and what doesn’t, you can feel confident knowing that the franchisor has already done this for you. 3. Franchisor Support A franchisor is only as successful as its franchisees. As a result, franchisors have a vested interest in providing their franchisees with as much support as possible. From launching your grand opening advertising campaign to overcoming unexpected hurdles months or years down the line, a good franchisor will be there for you when you […]

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Earlier this year, Entrepreneur.com published a slideshow titled, “5 Affordable Franchises You Can Start for Less Than $10,000.” So, can you really buy a franchise for four figures? If so, is it a good idea? How Much Does It Really Cost to Buy a Franchise? It appears that the article’s figures are based on the franchisors’ initial investment estimates in Item 7 of the Franchise Disclosure Document (FDD). For example, the first slide shows an initial investment of $3,245 to $21,850 for the Dream Vacations franchise. So, right away, you can see that while it may be possible to start a franchise for less than $10,000, it is also possible to spend twice that amount, if not more. As we often tell prospective franchisees, when reviewing the estimates in Item 7, it is generally best to assume that you will not be at the bottom of the estimated range. The second slide shows an even greater range of potential startup costs. For the Buildingstars commercial cleaning franchise, Entrenrepeur.com quotes the estimated initial investment at $2,245 to $53,200. In fact, among the five franchises you can start “for less than $10,000,” the lowest high-end initial investment is $17,000. Even so, $17,000 is still a fairly modest investment for purchasing a franchise (on the high end, the initial investments for hotel and restaurant franchises can easily range into the millions of dollars). So, is buying a “cheap” franchise a good idea, or are there hidden risks involved? Considerations for Buying a “Cheap” […]

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When buying a franchise, it is important to gather as much information as possible. While this primarily means gathering information about your chosen franchise opportunity, gathering information about competing franchise opportunities can prove valuable as well. But, most franchisors will only give copies of their Franchise Disclosure Documents (FDDs) and franchise agreements to serious candidates, and you cannot necessarily rely on details posted by third-party sites online (the information on these sites is often outdated). So, how can you compare franchise opportunities? 5 Sources of Information for Comparing Franchise Opportunities 1. Franchise Trade Shows and Expos Franchise trade shows and expos provide opportunities for prospective franchisees to meet with franchisors’ representatives face-to-face in a relatively low-pressure environment. There are plenty of these events across the United States each year, with the International Franchise Expo easily being the largest and most well-known. If you are serious about buying a franchise, visiting a trade show or expo may be worth your time, as you will be able to learn more about a multitude of different franchise opportunities. 2. Franchisors’ Websites While franchisors need to be careful about disclosing too much information on their websites, you can often find basic data about initial franchise fees, royalties, and system standards online. In many cases, this information will be presented in a table comparing the franchisor to its competitors. Of course, some franchisors’ websites are better than others, and any comparison tables you find are likely to be heavily skewed in favor of the franchisor […]

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Jeffrey M. Goldstein, founder of the Goldstein Law Firm, has been practicing franchise law for more than 30 years. Exclusively representing franchisees and dealers, he has successfully represented clients across the country in franchise agreement negotiations, arbitration, litigation and other franchise-related legal matters. Here, he sits down for a Q&A session to discuss some of the biggest legal risks facing new and existing franchisees: Q: What are some of the most-important legal factors to consider when buying or operating a franchise? In addition to facing the same legal risks as all business owners, franchisees face a number of additional risks as well. These risks relate predominantly to the rights granted to the franchisor under the franchise agreement. From operating standards to franchise transfer and renewal, franchisors have a say in virtually all aspects of franchisees’ businesses, and they will not hesitate to intervene (or even terminate a franchisee) when they believe that doing so is in the best interests of the franchise system as a whole. Q: How can prospective franchisees protect themselves before signing a franchise agreement? As a prospective franchisee, there are two primary ways to protect yourself before you sign a franchise agreement: (i) conducting thorough due diligence, and (ii) negotiating the terms of your franchise. By gathering as much information as you can from as many sources as possible, you can gain confidence in your decision to move forward (or to pursue a different path). Once you decide to pursue a particular franchise opportunity, then negotiating […]

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Whether you love cars or you are looking for a recession-resistant franchise with the potential for repeat business and a high sales volume, buying an automotive franchise presents both opportunities and risks. From seeing your customers every 3,000 miles to facing lawsuits when your customers’ cars break down and cause accidents, there are numerous factors that can increase both profit potential and liability exposure for automotive franchise owners. Here are four important legal considerations for purchasing an automotive franchise: 1. Liability for Employees’ Mistakes For automotive service franchises, such as oil change centers and repair shops, hiring well-trained and highly-skilled employees is of critical importance. When it comes to working on cars, trucks and SUVs, even minor mistakes can have drastic consequences. If one of your employees under-torques a drain plug or fails to properly bleed a customer’s brakes and the customer gets injured (or injures someone else) in an accident as a result, then your franchise could be in the line of fire. In addition to thoroughly vetting service employees, purchasing adequate insurance coverage can be critical to protecting an automotive franchise from business-threatening liability. Insurance policies should be crafted to meet the unique needs of the franchise, including both coverage limits and covered perils. 2. “Chain of Distribution” for Mandatory Products and Suppliers As a retail business, your automotive franchise will be in the “chain of distribution” for purposes of the law of product liability. This means that, if you sell a defective product that ends up causing […]

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When buying a franchise, you are required to make a long-term investment decision based upon imperfect information. You cannot predict the future, and this means that you have no way of knowing whether you will ultimately succeed as a franchisee. However, what you can do is take steps to ensure that you are making as informed a decision as possible. Here are seven steps that will help you make an informed buying decision: 1. Submit a Franchise Application With most franchisors, the buying process starts when you submit a franchise application. While there is a good chance that your application will be approved, even this early stage in the process can tell you a lot about the franchisor. Did the application ask for relevant information? Did it appear to be a template, or was it custom-tailored to the franchise? How quickly and thoroughly did the franchisor respond to your questions and requests for additional information? Were you provided with a current copy of the Franchise Disclosure Document (FDD) and franchise agreement, and were you asked to sign a receipt? 2. Assess the Financial Viability of the Franchise Opportunity The FDD and franchise agreement should provide information about many (but not all) of the initial and ongoing costs of franchise ownership. At this point, you should prepare a pro forma and consider whether you will need to apply for financing from the Small Business Administration (SBA), a private lender or another funding source. 3. Hire an Attorney to Review the FDD […]

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As a prospective franchisee, it is important to set reasonable expectations. On the one hand, you do not want to expect too much and set yourself up for disappointment (or failure). On the other, you do not want to expect so little that you fail to give adequate consideration to the legal risks (and opportunities) involved with buying a franchise. 1. Franchise Agreement Negotiations Reasonable: Negotiating Overly One-Sided Provisions of the Franchise Agreement Let’s start with negotiating your franchise agreement. Yes, you can negotiate; and, yes, most franchisors will consider reasonable requests to modify the overly one-sided provisions of their agreements. For example, if your agreement contains a non-compete clause, you may be able to negotiate a carveout that allows you to start or work for a company relying on the skills you acquired before you acquired your franchise. Unreasonable: Negotiating System-Wide Standards and Terms However, most franchisors will not consider negotiating the standards that they apply to franchisees on a system-wide basis – think mandatory suppliers and obligations to comply with the Operations Manual. Negotiating these types of provisions could make managing the franchise system untenable; and, as a result, requests for modification will usually be non-starters. 2. Franchise Due Diligence Reasonable: Gathering Information from Current and Former Franchisees When conducting your due diligence, you can expect to receive valuable information from current and former franchisees. The types of information they provide may be different (for example, former franchisees may be more willing to speak negatively of the franchisor), […]

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If your background is in finance, tax, marketing or business administration, owning a franchise may be compelling for a couple of different reasons. Not only could owning a franchise mean running and managing your own business, but it could also mean using your background and experience to help other individuals and businesses. Depending upon exactly what you are looking for, there are a variety of different franchise opportunities available in the business and financial services sectors. Of course, all of these franchise opportunities present different risks, and choosing the best franchise for your individual circumstances requires thorough due diligence and a careful assessment of the Franchise Disclosure Document (FDD) and franchise agreement. For prospective business and financial services franchisees, here are five special considerations to keep in mind: 1. Approved Products and Services For many people, one of the appealing aspects of buying a franchise is having access to an approved (and presumably well-vetted) list of products and services. However, as a professional service provider, this may not necessarily fit your goals. Will you be comfortable limiting your product or service offerings based upon what the franchisor allows? Might you feel hamstrung by not being able to offer a full suite of services based upon your personal background and experience? These are issues that could significantly impact your level of satisfaction as a franchise owner. 2. Professional Liability (Errors and Omissions) If you will be providing professional advice to individuals or businesses, you may need to factor premiums for professional […]

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When buying a franchise, you need to make several important decisions that can have lasting implications for you and your business. Among them is the decision of whether or not to hire a franchise attorney. With all of the startup costs involved, hiring a lawyer to review the Franchise Disclosure Document (FDD) and franchise agreement may seem like one area where you can save some money (after all, aren’t you just going to end up signing the franchise agreement anyway?). But, while this is a choice some prospective franchisees make, their decision is usually based on a lack of understanding of the services an experienced franchise attorney can provide. 5 Risks of Signing a Franchise Agreement Without Legal Advice Along with numerous other ways an experienced franchise attorney can help you make an informed buying decision, here are five key risks your attorney will be able to help you avoid: 1. Not Knowing What You are Signing Buying a franchise is a long-term investment, and a franchise agreement is a long-term, legally-binding contract. Once you sign, you are bound to comply, and the odds are that you do not have a way out that does not involve incurring substantial financial liability to the franchisor. Before you sign, you need to know what you are signing, and you need to make sure you are comfortable with the legal and financial risks involved. 2. Not Negotiating One-Sided Provisions of the Franchise Agreement Franchise agreements are almost universally heavily one-sided in favor of […]

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