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One of the quickest paths to having a business with great brand-name recognition and a tested operating model is to become a franchisee of an existing company. The initial investment is often substantial, and may total $250,000 or more, but many franchisees are able to recoup initial outlays and even become quite profitable. However, given the amount of money at stake, it makes sense to have an experienced attorney review both the legal terms of the agreement and the big-picture business aspects of the deal before signing anything. The benefits of legal review before entering a franchise agreement are multifaceted, and will help prospective franchisees identify unwanted legal and financial obligations that could jeopardize the success of the business.
First-time franchisees assume that because of the mutualistic nature of a relationship between a franchisee and franchisor, a franchise agreement will not contain one-sided provisions that run to the detriment of the franchisee. While it is true that franchisors are generally interested in the success of their franchisees, they also have an interest in protecting themselves in the event of unwanted future occurrences. Franchisees might also assume that well-established companies will be completely unwilling to accept modified terms to a franchise relationship. This too is often not the case.
In today’s world, you only get what you negotiate. And in the case of a prospective franchisee, the general tone and receptiveness of the franchisor to any negotiations over the terms of the franchise agreement can provide profound insight into the future nature of the relationship after the papers are signed. A franchisor is apt to treat a potential franchisee most favorably during the initial pursuit and courtship phase. Once the franchisee is legally bound, future treatment is unlikely to ever exceed the level seen during the courtship. For this reason, it is in a potential franchisee’s best interest to conduct a thorough review of the proposed agreement before becoming bound.
There are usually multiple documents that should be reviewed. The two main documents are the Franchise Disclosure Document (“FDD”) and the Master Franchise Agreement (“MFA”). A MFA usually contains several clauses that are generally constructed to favor the franchisor. Such clauses may include payment of royalties and limitations on advertising. Of course, these clauses are usually included to broadly protect the franchise system, but there should nevertheless be reviewed to determine how well they suit the needs of the franchisee.
The Franchise Disclosure Document can be quite long, and may appear to be a very dry and technical document. However, the FDD is highly important because it contains the full disclosure of the company, from financials to pending litigation.
It is important to note that because these documents have both legal and economic consequences, potential franchisees would be best served to engage the legal services of an attorney with accounting experience or with an MBA. Such an attorney will be capable of spotting any flashing red lights in either portion of the deal, and better positioned to offer guidance that allows a potential franchisee to reach an informed decision about the franchise.