Understanding franchise contracts, what an attorney wants you to know.
At its most basic, buying a franchise simply involves exchanging commitments and responsibilities between yourself, the Buyer, and the Franchisor. Those commitments and responsibilities will initially be laid out in the Franchise Disclosure Document and then further laid out in the Franchise Purchase Agreement when you finally go to close a deal.
Most business owners are smart and capable enough to read these documents and get a basic understanding of what’s required.
What they may not know, because they don’t have experience as attorneys, is:
1) How these documents are likely to be enforced either by negotiation, in arbitration, or in court
2) How to identify and prevent unlawful actions taken by a Franchisor
3) How to ensure your interests can be better considered and protected in this transaction.
This is the document that contains all the terms and conditions of your relationship with your Franchisor. It will explain both the Franchisor’s and your commitments, responsibilities, and liabilities will be.
Here is a few things you should know to get you started thinking about picking a Franchise that will be the right fit for you:
1. It’s the First Impression and What To Expect Document
You should consider a Franchise Disclosure Document to be a high-level overview of the Franchisor company you are looking into. It will contain legally required notices, facts about the company’s history and demographics, and some foundational information that is provided to help you understand what is required of you by the Franchisor.
2. It’s Legally Required To Be Provided To You
A Franchise Disclosure Document is required to be provided to you by all Franchisors you are seeking to work with. Some Franchisors may ask you to sign a Non-Disclosure, Non-Use, or even a Non-Compete Agreement prior to receiving a Franchise Disclosure Document. You should not sign one of those documents without reviewing it with an attorney or you could be closing doors of opportunity for no reason (and especially if no compensation is headed your way)!
3. It’s Not The Franchise Agreement
Since the FDD is a hybrid of a legally required notice and a sales pitch, it is not the legal “contract” you are signing onto. That contract is called the Franchise Agreement. You should not sign a Franchise Agreement without first receiving a Franchise Disclosure Document and doing due diligence on the company.
It’s better to have an extra set of eyes whose only goal is to ensure your lifestyle, needs, and goals are aligned with the additional obligations you’ll gain upon purchasing a Franchise.
What Do You Want People To Know About Franchise Purchase Agreements?
1. It is the Document You’ll be Accountable To
This is the document that contains all the terms and conditions of your relationship with your Franchisor. It will explain both the Franchisor’s and your commitments, responsibilities, and liabilities will be. It will let you know what enforcement mechanisms are available to you when things go wrong. But! Since no contract is perfect, you should also find out what gaps, grey areas, and leverage exist in the document by reviewing it with an attorney.
2. You Need to Understand It’s Terms & Conditions
If you think you know what a term or condition requires of you, but then find out you were wrong and have now violated your agreement – how would you feel? This document is almost guaranteed to contain some amount of legalese or jargon that only attorneys will recognize. This can cause confusion to people who think that the plain meaning of words is what is being stated.
3. Other Franchisees Can Help You Understand How It’s Enforced
Since no contract perfectly reflects every possible thing that can go wrong in the course of your relationship with your Franchisor, it’s often better to get an idea of how the Purchase Agreement is currently enforced by the Franchisor by interviewing other Franchisees that are already in the relationship. Once you find out how the Franchisor treats other Franchisees, you can better understand how the Purchase Agreement will affect your rights and responsibilities.
4. Other Franchisees Can Tell You How Well The Franchisor Keeps Up Their End of The Bargain
A Franchisor is only as good as the promises they MAKE and KEEP. Your Franchisor hired attorneys to draft these documents in their favor. That means the language in these documents may provide wiggle room for them to make something sound like a promise, but then they wiggle out of it later by saying you misunderstood their position or by under delivering on what you were expecting. For example, if they say they provide marketing support but don’t clearly outline what that is, you may be provided with a basic template website and phone number but no additional support. While that could technically be considered marketing support, you’ll want to find out if you can get them to better pin down what you’ll be receiving, or you may have to move on.
In my opinion, purchasing a Franchise is a significant enough of an event to shell out the extra money and hire an attorney to have your back. We have a whole legal marketplace based on people breaking agreements. You don’t want to find yourself in a foreseeable, or even avoidable, predicament just because you felt you could understand most or enough of what is put in front of you during this process. It’s better to have an extra set of eyes whose only goal is to ensure your lifestyle, needs, and goals are aligned with the additional obligations you’ll gain upon purchasing a Franchise.
Dominic Lovotti is an attorney in Boise, ID who has helped numerous business owners protect their interests and achieve their goals. Dominic works in other states and offers several options for reviewing the FDD to Start-UP documents.
Dominic Lovotti Founder, Attorney At Law