For many, purchasing a franchise appears to be the golden ticket to owning a business that is complete with an established brand name and a network of support. But like with any major decision, especially one that involves your money, you should be smart and protect yourself legally. Here’s how to play it safe when purchasing a franchise.
First, you need to do your homework on the franchise. Although it may be tempting, don’t immediately fall in love with the logo or the concept, even if it is captivating. Dig deep and research the company. Find out when they began or if they are making money. Speak to current and former franchisees by asking them how it was by discussing the good, the bad, and the ugly. This is the equivalent of reading a bunch of reviews before investing in a purchase online, only slightly more significant. If you hear a lot of grumbling or you see red flags, it may be time to steer clear.
You will receive a document known as the Franchise Disclosure Document or FDD. This is an important document that the franchise company is required to give you by law. Treat it like gold. It’s got loads of information that you will really want to know, such as the company history, the fees you’ll be responsible for (and they will charge you fees in one way or the other), rules you must abide by, and if other franchisees have encountered problems. Don’t just skim it. Read it over carefully, and if there’s anything that you don’t understand, that’s a massive sign to seek help.
Procure a good lawyer who knows franchises. This is non-negotiable. You should view your attorney as your translator for all that legalese in the FDD and the franchise agreement (the contract you’ll actually sign). They may have a chance to notice potential problems before they happen, to clarify what your rights and responsibilities are, and to help you understand what you are really getting into. Spending money on a great attorney now will prevent you from paying exorbitant amounts of money in the future, trying to mitigate problems you could have avoided.
While you’re familiarizing yourself with the FDD and your lawyer has given you the green light (or flagged any major issues), you will have your hands full with the Franchise Agreement. This is the real agreement, and it’s typically written with the interests of the franchise company in mind. Your attorney will be indispensable here, as they will be providing guidance on what you’re agreeing to sign. When you read the document, be sure to pay special attention to details, such as how long the agreement will last, what will happen if you want to sell your franchise down the road, and exactly what rules you must follow.
Don’t make any promises outside the contract. If the franchise salesperson is telling you all these great things that are not in the FDD or Franchise Agreement, mentally cancel them right now. It’s only in writing that you have a promise that’s legally enforceable.
Purchasing a franchise can be a wonderful opportunity, but it is a major commitment. By being diligent and taking the necessary steps to protect yourself, you can legally cover yourself and increase the likelihood of success with what is ideally, a less stressful business opportunity.
