There are numerous franchising opportunities, but a potential buyer of a franchisee must be beware and vigilant before buying a franchisee. Know what you are buying and know your obligations on the front end. Too often, a franchisee learns about critical and expensive obligations only after entering a franchise contract. Know this: A franchisor requires the franchisee to sign a written contract. The contract’s provisions are written by the franchisor’s lawyers and are designed to protect the franchisor, not necessarily the franchisee. Franchisors often require the franchisees to sign personal guarantees, which means that individuals buying the franchise are on the hook personally for any monetary shortfalls or claims. So, if the franchise fails for any reason, the individual is on the hook. Although some franchisees are satisfied with the franchisor, too many others regret their decision to buy a franchise. A franchisor usually demands a percent of gross revenues and can impose conditions on a franchisee that are difficult and frustrating for the franchisee. The franchisor admittedly has a significant interest in ensuring that all franchisees act responsibly. After all, a negative incident at one franchise location negatively can affect the franchisor and other franchisees. But to repeat: Understand the obligations on the front end.
Here is a definition of a franchise from Investopedia:
A type of license that a party (franchisee) acquires to allow them to have access to a business’s (franchisor) proprietary knowledge, processes, and trademarks in order to allow the party to sell a product or provide a service under the business’s name. In exchange for gaining the franchise, the franchisee usually pays the franchisor an initial start-up and annual licensing fees.
The law requires franchisors to provide prospective purchasers (franchisees) with the critical and important information that about the franchisor and the pros and cons of investing and running a franchisee. The disclosures cover specific items about the franchise opportunity, franchise officers, the risks, the pitfalls, the number of franchisees who fail, and other matters. Disclosure statements can run several hundred pages long.
Every franchisee buyer should review the franchise disclosure statement and contract with an experienced franchise lawyer BEFORE signing a contract. The lawyer can explain the advantages and disadvantages of the offer and contract and point out terms of the deal that the buyer may not appreciate. Contracts are written by lawyers and can be difficult to understand. A lawyer may be able to negotiate changes to the franchise offer or suggest rejecting buying a franchisee. Too often, franchisees sign contracts with burdensome terms and conditions. When a dispute arises with the franchisor and too often they do, the franchisee may be forced to defend in faraway forum, may have surrendered important rights, and not given enough thought to the practical problems and realistic liability before buying the franchise.
Our Nashville franchise lawyers can also help identify offers that may be fraudulent – in part, because of our business acumen and, in part, due to our experience as defense attorneys who represent clients accused of fraud and misrepresentation.
At the Law Office of Perry A. Craft PLLC, we understand how franchises work, when they’re a good option, and when the investor would be better starting his/her own business. We explain when franchises succeed and when they fail. We also defend franchisees when disputes arise with franchisors or when franchisors or franchisees are charged with white collar crimes. For help with all aspects of a franchise, call the Law Office of Perry A. Craft PLLC at 615.239.1899 or complete our contact form to schedule an appointment.