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Any business opportunity carries a level of risk. In franchising, this risk sits more heavily with a franchisee than a franchisor. If you are considering buying a franchise, you should seek independent legal advice from a franchise lawyer. Doing so can help franchisees identify and mitigate risks. This article will explore why prospective franchisees should seek legal advice about franchise opportunities before signing a franchise agreement.
Franchisee Due Diligence
When investing in a franchise, the principle ‘buyer beware’ applies. This principle means that buyers purchase at their own risk. Franchisees invest in franchise opportunities at their own risk, and, on balance, franchise opportunities pose more risks to franchisees than franchisors. Therefore, as a prospective franchisee, it is your responsibility to conduct thorough research about a franchise opportunity. If your franchise is unsuccessful, you could lose the money you invested.
Franchisee due diligence involves:
- reading all material the franchisor gives to you;
- online research;
- financial research;
- market analysis; and
- speaking to existing franchisees.
A lawyer can help you conduct thorough due diligence and advise you on the opportunity’s viability. Often, prospective franchisees are very excited about owning their own businesses. This excitement is why seeking advice from an independent lawyer who can offer impartial advice is vital. Their advice can help you make the right decision.
Assessing and Negotiating Contracts
You will sign a franchise agreement to become a franchisee. This key legal document forms the basis of your relationship with the franchisor. It sets out your rights and obligations and those of the franchisor. The agreement will protect the franchisor’s assets, such as their intellectual property and trade secrets. However, it is crucial that this binding contract protects both you and the franchisor.
Many franchisors with established networks share an identical franchise agreement with each franchisee. These franchisors are unlikely to be willing to negotiate the terms of the contract. However, suppose you would like to negotiate terms, such as removing a non-compete clause or adding exclusive territory. In that case, a lawyer can do this for you. They can negotiate on your behalf, contacting the franchisor directly or liaising with their legal team.
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Confidence in Your Investment
Contracts are often lengthy and difficult to understand. However, you can have confidence in your decision once a lawyer has assessed the contract and advised you on the opportunity. Following your lawyer’s advice, you might sign the contract knowing your investment is well-placed. Alternatively, you might turn down the opportunity and search for another. You can make a well-informed decision and be confident in your choice.
Planning for the Future
Following a complete assessment, a lawyer can also advise you on the future implications of the franchise agreement. Such implications include how you might renew or terminate the contract and approach selling your business. In the excitement of joining a franchise network, leaving it in the future is unlikely on your mind. However, you need to remain realistic. Circumstances can change, prompting you to leave the franchise and either begin a new business venture or even retire. You want to ensure you can smoothly exit the business without suffering legal penalties.
Mitigating Risk
A disadvantage of seeking legal advice is the cost. However, investing in legal advice at the beginning of your franchise journey is often a valuable business decision. Legal advice will not absolve all risks, but a lawyer can identify and help you mitigate many elements of risk. This step can save you money further down the line from poor investment choices or expensive disputes.
Discover the key legal and commercial issues to consider when buying a franchise.
Key Takeaways
Legal advice can prove invaluable to prospective franchisees. A lawyer can help you to conduct thorough due diligence about a franchise opportunity. It is your responsibility to choose what you invest in wisely. The principle ‘buyer beware’ applies to franchise opportunities in the same manner it applies to other types of transactions. A lawyer’s advice will enable you to make a well-informed decision about whether to invest.
Having somebody independent who can navigate the process with you at the beginning of your franchise journey can also be helpful. A franchise lawyer can break down legal jargon and ensure you fully understand franchise-related documents. They can also review the franchise agreement and other materials the franchisor has given you and identify unfair and impractical clauses.
Finally, a lawyer can help you identify and mitigate risks associated with the franchise opportunity. They can also help you understand the future implications of the agreement, such as the terms relating to renewal, franchise resale, and contract termination.
If you need legal advice about a franchise opportunity, our experienced franchise lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.
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