Legal Considerations when Purchasing a Franchise
Provided by HG.org
When considering launching a business project, someone may decide to purchase a franchise. However, it is important to understand the legal considerations that must be taken into account when buying a franchise from a larger company.
For those seeking to start a business, it may be easier to purchase a franchise that is already established with a name and predetermined customer base. There are various advantages to going through with this, but there are certain legal issues that should be fully understood and known before completing the purchase. This usually means research. The franchise that is considered should be studied for flaws, issues with income and various other concerns. Additionally, it is often recommended to seek the counsel of a business lawyer before and during the sale. There could be a contract involved, and these should be analyzed by a legal representative for potential issues.
The franchise agreement may have legal complications for the person thinking about purchasing, and it is vital that these clauses, conditions and terms are read and analyzed fully before the document is signed. Before buying, the person should study the market and how the franchise operates within the location and neighborhood. If the customer base is lacking there, it may be better to move to another location where the customers are seeking business heavily. It is important to know the financial history of the company and the specific franchise considered. This could reflect on the purchase and lead to economic disaster. It is also best to watch for any hidden costs that may not be apparent immediately.
The Market and the Contract
When deciding to purchase a franchise, there are potential legal problems that may exist with the market. If the franchise is selling certain items that are protected through intellectual property or other safeguards in the location, this means that the activity must cease or the owner could be facing severe legal issues. The market must be studied fully to include the neighborhood, products and services and other considerations such as cultural entanglements. If a predominant race or culture is living in the area, certain foods or other products may need to be sold over others. Additionally, if the age range is lower or higher, this means a change in technology, information and services.
The franchise agreement may contain various conditions or provisions. There could also be easements for other businesses within the parking lot or in the location such as a walkway designated for a restaurant that is on the property. The obligations of the franchisee are usually clearly defined, but if any details are confusing it is best to ensure they are answered before the document is signed. Some of these terms may affect the type of services and resources are sold or used within the building such as the brand of cup or color of plate. Some have more leeway in these matters, but it is crucial these conditions are understood fully.
The Financial History and Hidden Costs
Both the recent history and some years into the past should be researched and understood for the location selected. While certain seasonal increases are expected, if revenue is low for the majority of the year, this could be a bad investment. It is important to seek data from other franchises in the area as well as other franchises of the parent company to compare profits, losses and if the entire business is viable overall. Some persons may choose a different location, while others may decide that a different company should be sought. Some matters could be rectified through a change in management, but certain concerns exist due to the way the company is run in general.
It is imperative that if any hidden costs exist that the franchisee is aware of these matters. This means that some profits are accrued through overpriced silverware, expenses for items that are never used and services that are not actually provided. These concerns need to be addressed either through the agreement or by cutting the items out of the plan quickly. The franchisee should discover these expenses as soon as possible so that he or she is able to keep the extra and hidden costs from causing problems. When various food items add up to more than paid by other business owners, there is a problem that must be routed out.
The Legal Plan
Before making a commitment, a legal plan should be drafted. This usually involves a business lawyer and analysis of the agreement and other considerations.
Read more on this legal issuePurchasing a Business: Some Liabilities May Not Be Evident
Guide to Purchasing an Existing Business
How do I get my Business Ready for Sale?
Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer.