If you are thinking about buying a franchise, you probably have a list of factors that you are using to build a list of the brands you want to consider. The initial investment, royalty rate, number of local franchisees—these are all important considerations when choosing the franchise opportunity that makes the most sense for you. But, when you hire a franchisee lawyer to review your Franchise Disclosure Document (FDD), what are some of the issues that he or she will consider “red flags”?
5 Examples of Legal Issues that Could Spell Trouble for Prospective Franchisees
A franchisee lawyer reviews an FDD from a very different perspective than a prospective franchisee. For example, here are five potential “red flags” from a franchisee lawyer’s point of view:
1. A History of Litigation (Especially Involving Franchisees)
Most prospective franchisees skip over Item 3 of the FDD. However, from a franchisee lawyer’s perspective, the litigation disclosures in Item 3 can be extremely important. This is especially true if the franchisor has a history of litigating with its franchisees, although any significant amount of litigation could mean that the franchisors’ focus and resources will be shifted away from supporting franchisees and growing the franchised brand.
2. An Inexperienced Leadership Team
Many franchise systems grow out of successful retail businesses. If your franchisor owned a successful business and then decided to franchise, lack of experience in franchising—as indicated in Item 2—could potentially present a concern.
3. Lack of a Registered Trademark
One of the main reasons for buying a franchise (as opposed to starting an independent business) is to gain the ability to use the franchisor’s trademark. If the franchisor’s trademark is not registered—which will be reflected in Item 13—then it is possible that the franchisor’s rights in the mark could be lost.
4. Lots of Turnover in the Franchise System
If franchisees are successful and happy, they will stick around. As a result, when Item 20 of the FDD shows a lot of franchisee turnover, this will often be cause for concern. As part of the due diligence process, it is important to speak with both current and former franchisees in order to get their thoughts on what it takes to succeed as a franchisee.
5. Strict Controls Such as Mandatory Purchasing Requirements
Mandatory purchasing requirements, designated vendors, and other strict controls can help maintain uniformity within a franchise system, but they can also present risks for franchisees. The more control a franchisor exerts, the more potential grounds it will have to terminate an underperforming or “problem” franchisee.
Discuss Your Franchise Opportunity with National Franchisee Lawyer Jeffrey M. Goldstein
Are you considering a franchise? If so, it is important to have the FDD and franchise agreement reviewed by an experienced franchisee lawyer. To learn about our fixed-fee franchise business review services, please call 202-293-3947 or request a free consultation online today.
