When To Bring In A Franchise Lawyer Before You Sign Anything

If you see the same business in multiple locations, chances are it may be part of a franchise. The most recognizable franchises are fast food restaurants: McDonald’s, Burger King, Chick-fil-A, and many more. The services provided, even the logo, are familiar, and customers know exactly what they can expect, no matter where they order from.

However, from a business perspective, the heart and soul of franchises aren’t the recognizable logos or recipes, but contracts. If you’re thinking of investing in or owning a franchise, a good place to start is consulting with a franchise lawyer: someone who can analyze financial liabilities, look over contracts, reduce risks, and much more.

Read on to learn more about what a franchise lawyer does, and see if this is the right move in your career as an entrepreneur.

What Does A Franchise Lawyer Do?

Primarily, a franchise lawyer’s role is to review and negotiate agreements that pertain to the transfer and running of the business. The lawyer analyzes a Franchise Disclosure Document, or FDD, which explains the obligations of all parties involved.

Typically, this includes the previous franchise owner and the new one. Franchise deals are often fixed; a “take it or leave it” scenario. But a lawyer may be able to negotiate better terms for the person looking to take over the franchise.

What Is A FDD Meant To Tell You?

An FDD is a legal document that gives you all the necessary facts about the business before it is transferred to new hands. According to the Federal Trade Commission, companies must share this document 14 days prior to signing contracts or exchanging money.

The FDD contains 23 parts, or items, that explain different rules, costs, and other essential details, such as:

• Company background: The complete history of owners, previous names it was listed under, and other relevant information.
• Any legal issues: If the company was involved in prior court cases or lawsuits, they will be documented here.
• Startup costs: This includes the approximate cost needed to rent or replace operational equipment.
• Fees: Additional costs to run the franchise are mentioned here, along with ongoing royalties or ad costs.
• Your duties: This section details what products are sold and how the daily work is run.
• Territory: Understand where you are allowed to run this franchise, and if other locations can open nearby.
• Financial health: Learn about the company’s financial standing from the most recently audited statements.

What Are FDD Terms That Could Potentially Cause Trouble?

Because the FDD terms are generally fixed and therefore not negotiable, your franchise lawyer will point out any areas that could be an operational risk.

This may include:

• High turnover rates or closures
• Missing or otherwise misleading claims about earnings
• Territorial terms or exits that are unusually restrictive

What About Territory Rights?

This item of the FDD details the precise geographic areas where a franchise can operate, as well as limitations for competing businesses.

Types of territory rights include:

• Exclusive territory: The franchiser is prohibited from opening another location selling the same goods or services within a specific zone.
• Non-exclusive territory: This section details the right of the franchiser to open another location in a specific area.
• Site-only: Sometimes there is no territory mentioned at all, and the rights permitted are only for one specific storefront.

What About Renewal Or Transfer?

The rules for renewing a contract or transferring it are detailed in the FDD.

These rules include information about:

• Renewal conditions: Whether the franchisee can extend the agreement after the initial one ends, and what the renewal fee would be.
• Transfer conditions: This section outlines the transfer process, including requirements for approval and the franchiser’s first right of refusal.
• Franchisor annual FDD renewal: Not the same as a renewing agreement, the franchiser must update and renew the original FDD within 1120 days to continue a legal sale.

The terms of transferring franchise ownership are as follows:

• Franchisor consent: The franchiser must give formal written consent before the business can be sold.
• Right of first refusal: Legally, the franchiser has the right to buy the franchise themselves, or match another offer.
• Transfer fees: The franchiser may charge a fee that covers administrative costs, such as training the new owner.
• Buyer qualifications: The buyer must meet the current operational and experience standards of the franchiser.
• Release of liability: A general release of claims against the franchiser is required to be signed before the sale can occur.

What To Know About Required Suppliers

This section details restrictions on the sale of products or services, such as:

• Mandated purchases: All the goods, services, and inventory that must be bought or leased.
• Approved vs. Designated: This section distinguishes between vendors you must purchase from, along with product specifications.
• Franchisor Revenue: This section details whether the franchiser may act as a supplier to make an additional profit.
• Rebates and Kickbacks: Learn whether the franchiser can receive benefits from third-party vendors.
• Supplier approval process: If the franchisee can request approval to work with an unlisted supplier, that will be noted here.