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  • Writer's pictureJoe Dye Culik

The Importance of Due Diligence: A Cautionary Tale for Buying a Franchise

Buying a franchise is a big decision and should not be taken lightly. You should not let your excitement lead to the purchase or cause you to rush to sign a franchise agreement. Before signing your franchise agreement on the dotted line, it is essential to do your due diligence. Researching and understanding the franchise opportunity thoroughly can help you make an informed decision and avoid any unnecessary risks. After all, most franchise agreements are 10 years or more and offer no way to get out once you sign.

The Importance of Due Diligence: A Cautionary Tale for Buying a Franchise
The Importance of Due Diligence: A Cautionary Tale for Buying a Franchise

Having a franchise attorney review your Franchise Disclosure Document (FDD) before signing can also provide valuable insight and reduce the chance of any surprises down the road. A qualified franchise attorney can also do research beyond the four corners of the FDD about information the franchisor may not be required to disclose or may not want to disclose In this blog post, we will look at the importance of due diligence when buying a franchise and discuss why having a franchise attorney research your franchisor and review their FDD before signing is essential.


The Temptation of Buying a Franchise


For many aspiring entrepreneurs, the idea of owning a franchise is incredibly tempting. The promise of independence, a proven business model, established brand recognition, and ongoing support from the franchisor can make it seem like the perfect opportunity. However, it is important for aspiring franchise owners to resist the allure and approach the decision with caution.


Franchisors trying to sell you a franchise agreement should be treated like anyone else trying to sell you something – listen closely, listen skeptically, and think for yourself. After all, it’s likely that no franchisor has ever said to a potential franchisee that the franchisee should not pay the franchise fee and sign up under the franchise.


Working with a franchise law firm can help you navigate the complexities of the franchising world and ensure that you are making a well-informed decision. Don't let temptation and the franchisor’s “deadlines” blind you; take the necessary steps to protect yourself and your investment.


The Risks Involved in Buying a Franchise


Buying a franchise may seem like a dream come true, but it has risks. One of the most significant risks is the potential for legal liability and financial loss. Starting a franchise requires a significant upfront investment, and there is no guarantee of success. Additionally, you will face ongoing fees and royalties that can eat into your profits.


Another risk is the loss of control. As a franchisee, you must adhere to the franchisor's guidelines and standards, which can limit your autonomy and creativity. If you have a better idea about how to run the business, the franchisor is within its rights to deny your request – and, if you ignore their refusal, you are likely to be deemed in default, and your franchise rights could even be terminated. It is essential to weigh these risks carefully and consider whether the potential rewards outweigh them before deciding.


To be fair, you may be approaching a franchisor because of the branding, marketing, and systems they have in place. A franchise that produces positive economic results for other franchisees may very well do the same for you. Going into a franchise relationship should be something you do while fully informed about the terms and nature of the relationship to avoid any surprises that cause you to end up with something other than you thought you bargained for.


Conducting Due Diligence: What It Means and Why It Matters


Conducting due diligence is an essential step when buying a franchise. It involves thoroughly researching and analyzing all aspects of the franchise opportunity to ensure it aligns with your goals and expectations. This process allows you to assess the financial health of the franchise, evaluate the support and training provided by the franchisor, and understand the market potential and competition. By conducting due diligence, you can make an informed decision and minimize the risks of purchasing a franchise. Don't skip this crucial step; it can save you from potential pitfalls and set you up for success as a franchise owner.


Examining the FDD and Franchise Agreement: The Importance of Seeking Legal Advice

When buying a franchise, one of the most critical steps is examining the Franchise Disclosure Document (FDD). This document provides important information about the franchisor, their financials, legal obligations, and more. While it may seem overwhelming to sift through all the details, seeking legal advice from a franchise attorney can make the process much smoother.


A franchise attorney can help you understand the legal jargon, identify any potential red flags, and ensure that you are fully aware of the terms and conditions outlined in the FDD. Don't underestimate the importance of seeking legal advice before signing your franchise agreement – it can save you from costly mistakes in the long run.


Some of the things our firm does for due diligence are as follows. One thing we do is to conduct public-record searches of the franchisor, its affiliates, and its principals. There may be lawsuits or other legal issues that are not required to be disclosed in the FDD. There may also be negative reports, reviews, new articles, or other information that gives a better picture of how the franchisor treats its franchisees.


Another thing our firm does is review every word of the FDD and the franchise agreement. The FDD is a disclosure document, not a contract, and provides information about 23 categories of information that the Federal Trade Commission mandates. These may only be the tip of the iceberg, and you need to dive into the details of the financial performance representations in the FDD, openings, and closings of franchisees’ units, or finding areas that demand further information from the franchisor.


Potential franchisees should also ask as many existing franchisees as possible to find out what it has been like working with the franchisor and whether there is anything the franchisee wishes they had known before they started.


The Role of a Franchise Attorney in Protecting Your Interests


When it comes to buying a franchise, having a franchise attorney by your side can make all the difference. A franchise attorney plays a crucial role in protecting your interests throughout the entire process. They have extensive knowledge of franchise law and can help you navigate the complexities of the franchising world.


From reviewing the Franchise Disclosure Document (FDD) to negotiating the terms of your franchise agreement, a franchise attorney ensures that you fully understand your rights and obligations as a franchisee. With their expertise, you can rest assured knowing that your interests are protected every step of the way to the fullest extent possible. When you are about to enter into a decade-plus-long contract that the franchisor will rarely renegotiate after you sign it, there is no reason to leave money or rights on the table.


Understanding Your Rights and Obligations as a Franchisee


As a franchisee, it is crucial to understand your rights and obligations within the franchising relationship. Your franchise agreement outlines the specific terms and conditions that you must adhere to as a franchisee. This includes everything from payment obligations and advertising requirements to operating standards and territorial restrictions.


By understanding your rights and obligations, you can ensure you comply with the franchisor's expectations and avoid potential disputes. It is important to carefully review your franchise agreement and seek legal advice if you have any questions or concerns.


Preventing Disputes with Your Franchisor


Preventing disputes with your franchisor is essential for maintaining a successful franchise business. Open communication and a clear understanding of your rights and obligations as a franchisee can go a long way in avoiding conflicts. Regularly reviewing and adhering to the terms outlined in your franchise agreement is crucial, as is promptly addressing any concerns or issues with your franchisor. Additionally, seeking legal advice from a franchise attorney can help you navigate potential disputes and protect your interests.


Taking proactive measures to prevent disputes can save you time, money, and stress in the long run. For example, many franchise agreements contain a very short statute of limitations (the time limit in which you can raise disputes), choice of law provisions, and forum selection provisions that might require you to arbitrate any dispute across the country with an arbitrator who has a preexisting relationship with the franchisor.


There may also be steps you have to take before you can bring a legal claim. Failure to follow the mandated steps may result in waiving your rights. Franchisees frequently fail to follow the mandated steps or wait too long to bring a case, resulting in the wholesale loss of the right to seek a remedy for something the franchisor did that would have been wrongful.


Negotiating the Terms of Your Franchise Agreement


When it comes to your franchise agreement, negotiation is key. This is your opportunity to ensure that the terms and conditions align with your goals and expectations. A franchise attorney can help guide you through this process, identifying any areas needing adjustment or clarification. With their expertise, you can confidently negotiate terms that protect your interests and set you up for success. Remember, this is a crucial step in establishing a solid foundation for your franchise business, so don't be afraid to advocate for what you need.


The franchise agreement controls all material aspects of the franchise relationship and often requires negotiating revisions to it so that the relationship is less one-sided. A franchise agreement is what the law calls a “contract of adhesion,” defined as a contract drafted by only one of the parties with substantially disproportionate bargaining power. Each franchise agreement is different, but some standard provisions that require changes are those that relate to territory, defaults, fees, and what will happen if the franchisee dies or becomes disabled.


Final Thoughts on Owning a Successful Franchise Business


Owning a franchise can be a rewarding and lucrative endeavor, but it is not without its unique challenges. By taking the time to conduct due diligence, seek legal advice, and negotiate the terms of your franchise agreement, you can set yourself up for success. Remember, buying a franchise is a big decision, so proceed cautiously and make sure to protect your interests.


Having a professional review, negotiate, and advise you on your rights as a franchisee is like buying an insurance policy against many of the issues that can come up during the franchise agreement term.


You are investing thousands, or maybe even millions, of dollars in your franchise, and in most cases, you are agreeing to be personally liable if something goes wrong. A franchise attorney can give you assurance that the agreement has the best possible terms, giving you peace of mind and often saving significant amounts of money in the long run. With the right mindset and the right legal advice, you can navigate the franchising world with confidence and build the successful franchise business of your dreams.

 

Dye Culik PC is a business and franchise law firm. We are based in Charlotte, North Carolina, and work with franchisees throughout North Carolina to make sure you are protected and have your interests upheld in the franchise due diligence process. If you are considering buying a franchise, give us a call to find out more about the services we offer.

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