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What does a franchise lawyer want to know

PUBLISHED ON 29th of august 2014 ONLINE – FRANCHISING MAGAZINE

When you get legal advice about a franchise investment, what will a franchise lawyer want to know about you and your choice of franchise?

Buying a franchise, like buying any business, requires a lot of thought and due diligence. Reviewing legal documents is only one of many aspects that will need careful consideration. 

Other aspects requiring your attention will include thorough assessment of your personal circumstances, searching and finding a business that is suitable, reviewing all financial data provided, inquiring further into the reputation and market perception of the franchisor and the franchise system in question, and many others.

A franchise lawyer will want to know that you have dotted your i’s and crossed your t’s in assessing the potential franchise investment as a whole and will ask in relation to some or all of the following:

1. Preliminary questions

Have you done your research about the particular franchise system you are looking at buying? What have you found? What is the perception of the franchise system by consumers? Is the site (if the franchise business is to operate from specific premises) in a prominent location with adequate foot traffic? What are the total costs of your investment? What are the projections of profits? How long is the term of the franchise agreement and the lease? How many competitors does the franchise business have? Have you considered the opportunity provided as against its competitors in the market place? What is the vicinity of the closest competitor? 

2. Why buy a franchise?

Reasons for wanting to buy a franchise may change the legal advice to be provided, both in relation to the structure and the risk as well as in relation to the franchise documents. For example, some franchisees buy a franchise as a result of getting a redundancy and their main goal is for an alternative to employment. Others are looking for maintaining a specific lifestyle or getting into a particular industry or expanding their current offering.

3. Your personal situation

Careful consideration of your family circumstances and general lifestyle preferences is a must. For example, if the franchise business in question is a bakery and you intend to work as the baker in that business (as opposed to hiring one), this would require working through part of the night.

Other examples include running a retail shop or a restaurant whilst trying to minimise staff costs by working the business yourself (or with family members), which will require six to seven days a week commitment, working weekends and, in most cases, working some or all evenings.

4. Speaking with current and former franchisees

Franchisees, current and former, are the best source of information about the franchisor and the franchise system and may shed light onto issues you did not even consider. A franchise lawyer would highly recommend that you speak with as many former and current franchisees as you can.

5. Skills

Is your skills set suitable to the chosen franchise business? Do you need further training? Does the franchisor provide all the training you need? Do you need to obtain any further qualifications or licences? How long do these take to obtain and what are the costs involved?

6. Exclusivity

Are you being granted an exclusive area  or territory? This is important, as exclusivity is highly valuable in purchasing a franchise business.

7. Accountant’s review of franchise documents

Have you been provided with franchise documents? If so, have you engaged an accountant to review them prior to seeing a lawyer to ensure that the franchise business you are intending to buy is likely to be profitable?

8. Finance

Do you have the financial backing to afford all costs involved in buying a particular franchise business, including the initial upfront costs and all on-going costs. You may wish to speak to a financial institution early on in your search for a franchise business in order to ascertain your borrowing capacity and to start the ball rolling.

9. Structure

Have you considered the structure of how you will be purchasing the franchise business? Will you need to open a company or a trust? Do you need to restructure how your assets are held? Have you considered taxation implications of your proposed investment and how it will integrate with other assets held by you?

10. Exit strategy

Have you considered the exit strategy? If you wish to sell your franchise in the future, what steps will you need to take? Is there a right of first refusal option for the franchisor to buy your franchise business? What happens in the event of your incapacity or death?

11. Other due diligence

Have you done all other non-legal due diligence not mentioned above? Have you consulted with other advisers, for example an accountant? Do you need to consult with any particular industry experts?

Take your time and choose wisely.

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