This post continues our Buying a Franchise series. Before signing any agreement it is so important that you consult a lawyer, especially one specialising in franchising. Franchising is a complex business structure with specific legal requirements, using a non-franchise lawyer is therefore not in your best interest.
You will most likely be provided with a pro-forma copy of the franchise documentation. If you receive only a summary of the Franchise Agreement or just the Disclosure Document ask for a full copy. No reasonable franchisor should refuse this request.
A franchisor that won’t provide a full copy of the franchise agreement should ring warning bells. If the franchisor refuses to provide one – walk away.
The franchisor should provide you with a copy of a Disclosure Document as well as the Franchise Agreement.
The purpose of a Disclosure Document is to provide:
- Information on the sector the franchise operates in,
- The history of the business of the franchisor,
- Who the directors and shareholder are,
- The business history of the franchisor’s directors and key officers including any previous history of business failure they may have been associated with,
- The number of units granted, opened and the units that have closed or been terminated,
- The capital costs including working capital needed to establish the franchise and the profit and loss model based on the performance of current franchisees,
- The intellectual property being licensed.
You should engage a specialist franchise lawyer with experience in both business and franchising to review the proposed agreement, disclosure document and any other documentation the franchisor provides.
There is no value in engaging a non-specialist to review the Franchise Agreement because such agreements are, by their nature, substantially different to ordinary business contracts.
A specialist legal advisor is a must. It’s a worthwhile investment and importantly saves you the investment of paying a lawyer to learn franchising at your expense.