You have decided to purchase a franchise, what should you do next?

Read the Franchise Disclosure Document (FDD)

First read the FDD which has been provided to you. This document contains important information that will tell you a great deal about the investment you will be making, including anticipated costs, the background and the financial strength of the franchisor.

Contact Other Franchisees

The next advice I give my clients is to contact current and former franchisees of the system. Ask lots of questions, including ones to help you determine the strengths and weaknesses of the franchisor. This is one of the best methods of due diligence you can perform.

Consult with an Accountant

The third step is to review with an experienced business accountant the audited financials of the franchisor contained in the FDD. You should ask him or her to determine if the franchisor is sufficiently financially sound to support the system. Additionally, he or she should evaluate if this business appears to provide an opportunity for you to accomplish your financial goals.

Consult with a Franchise Attorney

Lastly you should consult with an experienced franchise attorney. Our firm provides the experience to advise you on making this substantial investment. Our advice includes counseling on the risks and advantages of the franchise, and can also include advising on forming the proper legal entity to run your franchised business, and reviewing and negotiating the lease for your business location.

FDD Review

We start with determining if you should acquire a franchise. Our review of the documents begins with a review of the FDD to gain an understanding of the franchise and the franchisor. We review the 23 items of the FDD, paying particular attention to the first few items which provide a great deal of information about the company and the litigation and bankruptcy history of the company. Additionally, we check the status of the trademark(s) to make sure they are federally registered trademarks. After all, when you are buying a franchised business, you are acquiring a business that operates under a trademark. It is important to be sure that the trademark is federally protected.

Franchise Agreement Review

At Lanard Law, our analysis continues with a thorough review of the franchise agreement. While reviewing the agreement we make note of obligations (financial, reporting and others) that the franchisee will have to the franchisor. Although some agreements are not negotiable, some agreements are. Therefore, we suggest revisions to the agreement which would make the document fairer to the franchisee. Some of the modifications involve providing a standard of reasonableness when franchisor approval is required, providing more notice prior to the franchisor’s exercise of its remedies upon default, insuring that any required indemnification by the franchisee to the franchisor is limited, and requiring that the franchisor provide indemnification to the franchisee for any trademark infringement actions or claims. These are just a sampling of some of the modifications that can often be negotiated with the franchisor.

Entity Formation

Once the franchise agreement is reviewed and negotiations are completed, we discuss the type of legal entity under which the franchisee should operate the franchised business. In conjunction with the franchisee’s accountant, a decision should be made whether the business should be an S-corporation or a limited liability company.

Lease Review

The last piece in representing a retail franchisee is reviewing and negotiating the shopping center lease for the business. Reviewing the lease for the retail location requires years of experience in representing retail tenants and in dealing with the same lease forms and the same landlords. As a firm that dedicates a significant portion of our practice to franchise law, we handle a great deal of commercial shopping center leases as a natural corollary to representing retail franchisees. These documents are highly negotiable, from the business terms, to the legal nuances. Our experienced attorneys know the many legal issues and types of business terms that the less experienced attorney, general practitioner and the real estate broker won’t know to negotiate. In addition, we have found that any review performed by the franchisor is not a substitute for an independent legal review. Typically, it isn’t just revising what is in the lease that makes a commercial tenant stronger, but adding all of the additional provisions that can protect you and save you money.

Contact the Experienced Franchise Attorneys at Spadea, Lanard & Lignana

It is clear that even when a franchise agreement is not negotiable, it is important to retain experienced franchise counsel to assist you with this process. You are undertaking a large financial obligation and it is extremely important to know that someone is on your team putting you in the best possible legal position in which you can be. The attorneys at Spadea, Lanard & Lignana will look forward to being your teammate.  Contact the attorneys at Spadea, Lanard & Lignana today.