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If you're looking at buying a franchise, then you will find that there are a number of legal questions that you need to ask before signing on the dotted line. In fact, in-depth research, analysis and careful consideration are all essential if you are to invest in the right franchise opportunity for your needs and to make it successful. When dealing with the legal paperwork for your franchise, it is worth using the services of a legally trained professional who can explain particular terms and clauses and highlight any areas of concern. The franchise's head office will also provide explanation and insight into the terms and clauses of the legal documentation and good franchises will go the extra mile to explain exactly what you are signing up to. Here is a closer look at some of the more common issues associated with franchising legalities and contracts.
You'll need to find out which individuals - or entities - will be responsible for carrying out the various obligations of the franchise contract. For example, if a corporation is acting as a franchisee, will any kind of personal guarantee be necessary and if it so, what obligations will this cover? If, on the other hand, the contract is to be executed as an individual franchisee, can that person assign the franchise over to a corporation that she or he may own? Are there also any restrictions in place on the other activities that the franchisee might be involved with, along with their family members? (For example, there may be restrictions on being employed by, owning, or otherwise participating in competitor businesses that act as rivals to the franchise.)
Many franchises have their own particular geography which the franchisee buys into. If this is the case, find out if the location has already been selected and if not, ascertain how this happens. Find out too if the franchise will be granted only if the franchisee can obtain (and maintain) a lease for that location. Can you, as the franchisee, relocate if the lease expires or becomes 'condemned' or if your region has poor business results? Are there other situations in which you'll have the right to relocate if your area doesn't work out for you?
Find out too if your territory is going to be exclusive and, if so, make sure that it is defined within the contract, with details about the nature of this exclusive arrangement and any protection that it grants. For example, protection of territory may only be granted if the franchisee incumbent within that area is achieving certain levels of performance.
This is a complex area and should be reviewed very carefully. Find out what type of trademark agreement is in place. Can the franchisor force the franchisee to change the trademark and, if so, under what circumstances could this occur?
If you believe that representations have been made which are critical to your business plan as a franchisee, or which you will rely on for the success of your business, make sure these are defined in the agreement and comprehensively so.
If you will need to renew a franchise license at any point, ensure that your contract defines the terms of this renewal and the instances in which you might not be allowed to renew - for example, if you lost the lease for your premises, didn't meet the minimum levels of performance or if the franchisor's business plan changed. Review these clauses very carefully.
Find out what the terms and conditions are for cancelling the franchise contract and what the circumstances are in which you can do so. When can you terminate and what will happen to your lease and the assets of your business if you did? Would you have the option to purchase the business if an expiration or termination of the franchise occurred?
If the success of your franchised business would be reliant on your ability as a franchisee to obtain a certain quality or type of product at the right price, what supplier arrangements are in place and what factors could affect this? Are there restrictions on the types of branded goods you can buy from other suppliers? Can you purchase alternative goods from other suppliers and under which circumstances could you do this?