You've found a franchise that you feel you have a reasonable chance of success owning. You've talked to several current franchisees (10 to 15 of them if possible) and have had them answer your most burning questions. You're working on your business plan. You may have paid a visit to franchise headquarters. In other words, you're almost there. You're almost a franchise owner.
You have one more thing to do, and it has to do with the law. You need to do everything in your power to protect yourself legally, and there's only one way to do it: You need to hire a franchise attorney.
Here are the four reasons why.
1. They know what matters
All prospective franchise owners are required by law to receive the Franchise Disclosure Document (FDD) before they actually buy the franchise they're interested in.
This 150- to 200-page document covers everything that the Federal Trade Commission (FTC) feels that you need to know about the franchisor. (For a breakdown of the FDD, click here ). It's important to be intimately aware of everything in the FDD, as there are certain restrictions and obligations you'll have as a franchisee and you could be terminated if you don't abide by them.
There are approximately 1 million attorneys in the United States, and a couple thousand of them have chosen to specialize in franchising. Franchise attorneys know what to focus on in the FDD and in the actual franchise contract. They've probably written a few FDDs, so they know exactly what to look for when they're reviewing them for prospective franchisees. They also keep up on ever-changing franchise laws, including some that may be specific to your state.
2. They can advise you on choosing a business entity
A competent franchise attorney can offer useful suggestions on how your new franchise business should be set up. Should your business be a Limited Liability Corporation (LLC)? A Subchapter S Corporation ? C-Corporation? Do you know the differences?
Choosing the right business entity for your new franchise is crucial. It will determine your legal rights and liabilities as a business owner, and will also determine how your business is taxed.
3. They can help you if things go south
No one goes into franchising expecting to fail. But, what if unseen circumstances force you to close down your business? Maybe you really weren't a good fit for the franchise you chose. Maybe you didn't make money fast enough. Maybe your choice of location turned out to be a lousy choice.
Maybe you're even blaming the franchisor for your business's failure.
In 2009, a franchisee sued Big-O Tires for fraud.
The franchisee alleged that Big O: (1) told him (falsely) that he did not need experience to operate a tire store; (2) provided exaggerated earnings claims; (3) concealed from him that many of its franchisees had failed; (4) told him that it would sell him tires at competitive prices, when the same tires were often available for less money from other sources; (5) falsely stated that it develops new products and services (6) had expertise in locating and outfitting stores.
The Court ruled against him because the disclosure document he received before he bought the franchise contradicted all of his claims.
"The Court found it significant that, on the cover page of the disclosure document, the franchisee was admonished to read the circular carefully and show it to an accountant. The franchisee admitted that he did neither."
This franchisee learned the hard way why it's important to read the Franchise Disclosure Document, cover to cover, before buying a franchise. Not only did he barely read it, he never hired a professional (like a franchise attorney) to go through it with him.
I'm not sure why the Court mentioned the word, "accountant" in the ruling; accountants are not trained to go through the legal aspects of buying a franchise. But, franchise attorneys are.
4. The franchise development director tells you that you don't need one
If a franchise development director ever tells you you'd be
wasting your money by hiring a franchise attorney, since nothing
is negotiable in the franchise agreement, ignore it.
The real reason why you'd hear a statement like that has more to do with the franchise development director than you. He (or she) wants you to sign the agreement signed. Salespeople are trained to get stuff signed – in this case, a fairly wordy document that's difficult to understand without proper legal representation. And, some of it may in fact be negotiable.
Hire a competent franchise attorney. You'll sleep better at night
if you do.
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