When considering the purchase of a franchise, it is important for prospective franchisees to understand the Franchise Disclosure Document (FDD) provided by the franchisor. The disclosure document provides all relevant information about the company including a history and overview of employees, as well as the franchise agreement which outlines what the franchisee is guaranteed by the franchisor, obligations of the franchisee under the contract, costs associated with purchasing the franchise, and more.
It is a good idea for potential franchisees to obtain legal advice and to understand the key questions to ask prior to signing a franchise agreement. The laws related to franchises, dealers and distributorships are very specific and can also differ by state. Some states have their own franchise laws and depending on where you intend to start your business, additional paperwork may be required.
Question 1: What type of trademark protection is offered by the franchisor?
Does the franchisor have its trademark federally registered? What kind of protection has been awarded to the franchisor? How likely is the franchisor to encounter issues with its marks and how might it affect its franchisees?
Question 2: Where will the franchise be located?
Who will be responsible for site selection? Does the franchisor assist with site selection or is the granting of the franchise dependent on the prospect's ability to obtain a lease in a specific location? Will the franchisee have the right to relocate the business if necessary? Does the franchisor offer territory exclusivity and, if so, what type of protection is provided? Is protection dependent upon performance goals?
Question 3: What is the personal liability and obligations under the agreement?
Who will be responsible for the franchise's performance and fulfillment of commitments per the franchise agreement? Will the franchisee execute the contract as a corporation or an individual? Will a personal guarantee be required and, if so, what obligations are covered under the contract? Are there any restrictions that could potentially conflict with any existing or future business interests or activities, such as ownership or other involvement in a competing business that could affect the franchisee or its relatives?
Question 4: Where will essential products the franchise sells be obtained?
Does the franchisor have arrangement in place to provide franchisees with the necessary products needed to run the business? This is especially important if the franchise's success largely hinges on the ability to provide a specific type or quality of product to its customers. How will the franchisee obtain essential goods at an economic price from a trusted source? Are there any restrictions on the brands or the sources of the products used by the franchisee?
Question 5: Can the franchise be transferred to another owner?
Will the franchisee be permitted to transfer interests in the business under the agreement? Are there any restrictions on transfers and of ownership interests? Does the franchisor have the right of first refusal regarding proposed transfers?
Question 6: What are the restrictions regarding renewal of the franchise agreement?
Are there prohibitions for performance goals, location changes, lease expirations? Is the franchisee relying on their ability to renew the franchise at the end of the agreement terms?
Question 7: What are the restrictions regarding termination of the franchise agreement?
Under what circumstances is a franchisee able to terminate the contract? What are the franchisee's obligations following termination? What happens to the franchisee's lease and business assets upon termination? Does the contract provide the franchisor the ability to purchase the franchise?
Question 8: Are there any omissions in the franchise agreement?
Are all representations made by the franchisor adequately covered in the franchise agreement?