When you are buying an existing franchise business, you have several issues about which to be concerned. You will need to make sure that this is the right franchise system in which you should invest. You will need to form an entity to have title to the franchise and assets you will be acquiring and you will need to evaluate the actual business you will be acquiring from the current franchisee/seller.
In evaluating if this is the right franchise system in which to invest, you will need to do all of the validation/due diligence that you should do when investing in any franchise. You should speak to as many existing franchisees around the country as you have time to call to determine if they recommend the franchise. I typically recommend at least 10% of the existing franchisees (more if it is small franchise system and less if there are hundreds or thousands of franchisees). The existing franchisees are your best resource. After you have spoken with the franchisees of the franchise system, you should retain experienced franchisee counsel, like us, to review the documents and advise you on them.
Secondly, you should form a separate legal entity to hold title to the franchise and the assets of the franchise business. This entity is typically a corporation or limited liability company. Your tax advisor should provide tax advice on which entity is better for you and your particular situation.
Lastly, after the franchise documents have been evaluated and you are sure you wish to move forward with investing in the franchise, then you should have an accountant and an attorney who can evaluate this particular franchise business opportunity and determine if the price for which it is being sold is appropriate, that the assets of the business being sold are free and clear of liens, that the lease for the business location can be assigned and that you are being given proper warranties on the business and the assets. It is critical that you retain experienced professionals like our firm to advise you.
It is unfortunate that many people do not take the time or are unwilling to pay the professional fees to perform the due diligence necessary in properly protecting themselves when buying an existing franchise business and find that they have acquired a business that is not what was presented – either with liabilities they did not expect, liens on assets that they did not know about, a lease that was not properly assigned or that had issues of which they were unaware, or a franchise system that was not successful or was wrought with issues. Retaining us for your acquisition, is one way to help prevent these types of issues.