Many people feel that owning a franchise is a better way to start a successful and lucrative business than establishing your own business since you are buying an existing brand with “turnkey” processes.
It may seem appealing, but buying in a franchise entails a slew of legal concerns and duties that you might not have contemplated previously. To assist you in identifying potential obstacles, here are some critical legal considerations to examine when purchasing a franchise.
1- Structure
There are several methods to organize a business’s ownership, and it’s advisable to consult with an attorney and an accountant before signing anything. A corporation can be established to own an enterprise, and a trust organization can be established to reduce taxes and risk. Sole proprietorships and partnerships are also popular and may even be needed to own and run specific franchises. Each form of business organization has pros and cons that you should thoroughly research before purchasing.
2- Understand The Franchise Agreement, Code of Conduct, and Disclosure Document
The franchise contract and disclosure paper define the legislation for all entrepreneurs, and it is a wise idea to become acquainted with this document before joining a franchise. Because the agreement and disclosure documentation frequently place rather stringent restrictions on the franchisee, you should be informed of their commitments from the start. On top of the initial service charge, franchisees frequently have tight requirements that must be maintained, such as a continuous service fee and a marketing fee. These expenses will vary based on the franchise, and you must guarantee that your funds can meet them.
Similarly, you should be familiar with your rights under the Franchise Code of Conduct, as well as what the franchisor may and cannot expect. A franchisor, for instance, is not permitted to ask you to sign a general release of the franchisor’s liabilities; nonetheless, most franchise agreements will include an indemnification clause pertaining to violation of the franchise contract.
3- Occupation Rights
Make certain that you understand if the franchisor or you will maintain the leasing of any properties and who will be responsible for the interior floor plan additions. If you carry on the obligation, you must organize the lease, but if the franchisor is in charge, they must supply you with a license to occupy. A license to occupy and lease have different legal obligations and expenses, so get counsel on the differences and risks involved.
4- Exit Strategy
Before purchasing a franchise, it is critical to establish an exit strategy in place. Some franchisors may even mandate or educate their franchisees on this to guarantee they understand what is required to develop a firm that can be sold. Similarly, some franchisors may already have a built-in resale scheme that all franchisees must adhere to.
It is also important to understand how the franchisor may terminate the franchise. The termination provision in the franchise contract will often mention this, as well as the franchisee’s and franchisor’s duties in the event of such termination – a notice will be necessary, and the franchisee may be expected to satisfy the extra legal requirements.
Basically, when buying a franchise, you must be informed of your long-term legal responsibilities, especially your duties to the franchisor.
