What Do I Need to Know Before I Buy a Franchise?

Buying a franchise is a complex, long-term investment that has the potential to change your life. If your business succeeds, you may never have to work for someone else again. If it doesn’t, you could lose your investment, and you could find yourself bound by strict non-competition covenants that prevent you from using what you’ve learned to try again on your own.

When buying a franchise, there are three primary legal steps you need to take in order to make an informed buying decision and position yourself for success as a franchisee. These are:

• Reviewing the Franchise Disclosure Document (FDD)
• Conducting Your Due Diligence
• Negotiating Your Franchise Agreement

1. Reviewing the Franchise Disclosure Document (FDD)

The Franchise Disclosure Document is a federally-mandated document that franchisors are required to give to prospective franchisees. It is comprised of 23 “Items,” each of which contains specific pieces of information (or is supposed to contain specific pieces of information) about the franchise opportunity.

When buying a franchise, it is imperative that you review the FDD in detail. From information about initial and ongoing fees to information about the franchised brand, it’s all in there. If you have any questions, or if anything in the FDD seems inconsistent with what you have been told by the franchisor’s sales personnel, you will want to address your concerns before you move forward.

2. Conducting Your Due Diligence

Another key aspect of the franchise buying process is what is referred to as “due diligence.” In a nutshell, this is the process of gathering as much information as you possibly can. There are several aspects to conducting due diligence as a franchisee, including:

• Speaking with current franchisees
• Speaking with former franchisees
• Reading online reviews and browsing franchisee forums
• Reviewing competing franchise systems’ FDDs
• Preparing a pro forma and speaking with business lenders
• Scheduling a visit to the franchisor’s headquarters
• Reviewing the franchisor’s financial statements (which should be included as an attachment to the FDD)

3. Negotiating Your Franchise Agreement

If you decide that you are ready to move forward with your purchase, the last major step in the franchise buying process is negotiating the franchise agreement. Franchise agreements tend to be heavily one-sided. Franchisors know this, and good franchisors will generally be willing to consider reasonable requests for modifications. From protecting your renewal rights to limiting your post-termination restrictions, there are various key provisions that you may need to negotiate in order to mitigate your risk as a franchisee.

Keep in mind, these are not the only legal considerations involved in buying a franchise. For example, you will likely want to form a corporation or limited liability company (LLC); and, if you will be leasing retail space or a vehicle for a mobile franchise, you will need to carefully negotiate the terms of your lease as well. In order to protect your personal finances and give yourself the best chance of succeeding as a franchisee, it will be important for you to get help from an experienced franchise attorney.