Buying a franchise is a popular choice for aspiring entrepreneurs, but this is an investment that must be carefully considered. To protect yourself, you should work with an experienced business law attorney to complete the transaction.
Franchise Agreements Are Often Complex
A franchise agreement allows you to pay a fee to access a company’s format or system for running a business. The fee gives you the right to use the franchisor’s name and sell their products while accessing specific corporate assistance for day-to-day operations. McDonald’s, KFC, Subway, 7-11, Kumon, and Wyndham Hotels & Resorts are just a few of the many examples of large companies offering franchise opportunities.
When you buy a franchise, you’re obligated to abide by the company’s rules and regulations. Having an attorney review all legal documents ensures you understand exactly what to expect from your new endeavor.
Areas of particular importance include:
You could be required to contribute to a national advertising fund that promotes the franchisor’s products or services instead of your specific franchise location.
Typically, a franchise system provides you with a specific territory in which to sell their products. This could be a certain city, a county, or a number of miles.
Litigation statute of limitations.
If a dispute arises between you and your franchisor, the agreement may require a mediation period before getting lawyers involved. This can be problematic if the mediation period uses up a large part of the statute of limitations for taking the case to court.
These clauses can limit your ability to stay in the same industry if you want to launch another franchise or create your own brand in the future.
The renewal of your franchise agreement may not be automatic, or the franchisor may have the right to change the terms of the agreement before allowing you to renew.
Right to close.
It might surprise you to learn that you don’t automatically have the right to shut your doors if you can’t turn a profit. You may be obligated to continue operations through the end of the term of the agreement or until you can find a buyer for the franchise.
Right of first refusal.
This gives the franchisor the right to buy back the business if you decide to sell your franchise unit. Or, it could give the franchisor the right to approve any buyer you find on your own.
Royalty payment structure.
In some cases, the franchisor might collect automatic royalty payments—which can make it difficult to keep your business open during slow sales months.
The franchisor may set circumstances that could trigger the termination of your agreement, such as missing a required payment, and you could lose your entire investment.
To avoid the appearance of playing favorites, franchisors may say the terms of their contracts are non-negotiable. However, you should still have an attorney review all documents to ensure the terms you’re being asked to agree to aren’t unnecessarily restrictive.
Your Attorney Can Also Provide General Business Advice
In addition to issues that are specific to owning a franchise, your attorney can help with more general concerns. This includes:
Determining the best legal entity to use for your business.
Your attorney can evaluate your goals and help you determine whether you should set up as a Sole Proprietorship, Corporation, S-Corp, or Limited Liability Company (LLC).
If this is your first time owning a business, your attorney can ensure you’re keeping the correct records and taking all applicable steps to minimize tax liability.
Drafting partnership agreements.
If you’re buying a franchise with another individual, your attorney can make sure you’ve clearly outlined the terms of the partnership.
Negotiating your commercial lease.
Leasing a commercial space isn’t like renting an apartment. Commercial real estate leases are complex and written to favor the rights of the landlord. However, a business law attorney can often negotiate more favorable terms for you.
Do You Need To Speak With An Experienced Business Law And Succession Planning Attorney?
If you need to speak with an experienced business law and succession planning lawyer please feel free to contact us online or call our Virginia Beach office directly at 757.490.3500 to schedule your free consultation. We have offices throughout Virginia including Chesapeake, Newport News, Norfolk, Suffolk as well as north eastern North Carolina.