Purchasing a franchise is a complex undertaking. Anyone interested in this kind of business must enter into a franchise agreement, which is a type of licensing agreement that binds the franchisor and franchisee together. This document explains what the former expects from the latter in terms of operating the franchise business. There are several elements in the agreement, and it is important for the franchisee to understand them all. Since this is a legally binding contract, an attorney experienced with the franchising process can offer valuable assistance and ensure that the franchisee understands the terms, rights and obligations set forth.
A Franchise Disclosure Document explains the offering
The franchise agreement is preceded by a Franchise Disclosure Document (FDD), the purpose of which is to provide information about the offering and the relationship that would exist between franchisor and franchisee. This gives the potential franchisee the opportunity to conduct due diligence before making a final decision on joining the organization he or she is considering. The FDD should provide details about company history and background, disclose information about any lawsuits or bankruptcies, give financial data and explain confidentiality restrictions.
What to look for in a franchise agreement
Someone interested in purchasing a franchise should work with an attorney to examine and understand all the ramifications of the franchise agreement. A number of questions should be asked, including:
- Are the franchise agreement and the FDD consistent?
- Are the elements of the franchise agreement in compliance with current state laws?
- If verbal promises were made about investing in the franchise operation, have they been included in the franchise agreement?
- Does this agreement require the potential franchisee to sign a personal guarantee?
- Are there extra services, such as additional training or field support, that should be included in the franchise agreement?
Areas of confusion or uncertainty should be clarified by the franchisor, and certain points negotiated in favor of the franchisee, if possible.
The final contract
The franchise agreement is part of the final contract. It sets out the rights granted to the franchisee, the obligations of both parties, trade restrictions and termination provisions. The other part of the contract is the purchase agreement, which covers the franchise package itself, as well as the price and services to be provided. The contract should be subjected to a final, thorough legal review by an attorney. If any improprieties are found, or reservations arise, bring them up while there is still time to withdraw from the transaction.