Purchasing a business can be complex to navigate with frequently changing business landscape and legal and regulatory requirements of the industry and government policies. You can consider purchasing a franchise business or an independent business. In this circumstance, having an experienced Commercial Real Estate Lawyer can be invaluable.
What is a Franchise Business?
A franchise is a type of business where the franchisor allows the franchisee, the right to use a business name, trademark or the operating methodology associated with operating a specific business. You may have seen franchise business models in the restaurant and retail industries, though they are found in almost all the sectors of the economy.
The franchisee makes agreed payments of the franchise fees including one-time franchise fees and additional royalty payments on a monthly or annual basis.
Franchise models are established businesses which need lesser capital than starting an independent business. They come with lower initial risk and have higher resale values as well. Franchise businesses typically have an existing customer base as brand and product awareness is already present.
The franchisor also helps in setup, support and training for the franchisee to help in starting up their franchised business. The existing franchisees also are a huge support system and can help you start operations quickly. Do note that you possess lesser control of business operations than with an independent business as you have a predetermined cost and royalty structure to follow.
What are the Factors to Consider Before Investing in a Franchise Business?
Performing Due Diligence
When you are considering any franchise business, make sure that you do its complete due diligence before actually signing any purchase documents. Your Commercial Real Estate Lawyer will research, investigate and analyze the franchise business’ details, valuation and operating methodology to confirm if the investment should be made.
The entire due diligence process should be done for all franchise business; you may be considering to purchase. The due diligence should be done notwithstanding, the number of years or the reputation of a particular franchisor.
In fact, the Canadian Franchise Association recommends all potential franchisees to fully understand and evaluate the business model before making any investment.
In 2000, the Government of Canada passed legislation which made it mandatory for franchisors to make a Disclosure Document available to their prospective franchisees, before signing any agreement or accepting money for the franchise agreement.
A Disclosure Document is a detailed document which enables prospective franchisees to know all the relevant business information and details about the franchise business under consideration for purchase.
Potential franchisees need to thoroughly review the Disclosure Document and other associated documents with their Commercial Real Estate Lawyer. Your Lawyer will confirm if the document lays down all material facts and details about the franchise business and seeks to satisfy the franchisor’s duties and responsibilities legally.
It is recommended to contact a Commercial Real Estate Lawyer before you finalize the franchise and sign any documents. This would be absolutely an essential step to avoid thousands of dollars in contractual obligations later on. The Lawyer will also help you review and analyze the Disclosure Document in a detailed manner, understand the franchise business model and how well it fits into your circumstance.
The Franchise Agreement
Franchise Agreement is a draft copy of the franchise business arrangement between the franchisor and the franchisee. It is referred to as a draft as it is a standard format which can be customized to suit the specific circumstances of the parties to the contract.
You can make use of the fourteen-day window in the contract duration to mutually address all concerns in the agreement with the other party. Your Commercial Real Estate Lawyer can make sure that your legal interests remain protected in the Franchise Arrangement and other related agreements.
The Franchise Agreement includes detailed information on the royalty rates, franchise fees, product pricing on purchases from the franchisor, territorial information and the other terms and conditions of the contract. Do make sure that all the rules laid down in the agreement are comfortable with you as a Franchisee.
It is advised to select the most vital points or clauses in the Franchise Agreement for negotiation as negotiating on all the agreement clauses may not be possible. Take the necessary steps and perform the due diligence process to make informed decisions.