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Bob Frankman's picture

"What are the basic legal

QUESTION: "What are the basic legal areas I should know about in buying a franchise?"

Well, here's my two cents worth. When I think of legalities, I think of the following quote coming from the mouth of the franchisor trying to sell me.

"All the things I really like to do are either illegal, immoral, or fattening." - Alexander Woollcott

That's probably not the case but it keeps me on my toes when I think that whoever is selling me such an expensive product is trying his hardest to pry my money out of my hands. Fortunately, there are certain regulations, industry norms and advisors that help those of us buyers who probably won't really have the scoop on the franchise until well after we've bought the shop. These are the things that I would pay attention to on legal issues.

  • The most basic legality to consider is the UFOC. classic letter to the FTC
  • Item 19 of the UFOC provides aggregate information on store earnings. Unfortunately, only a quarter of the franchise systems fill out the earning information, the cowards! 
  • Read the Franchise Agreement very carefully. It's worth your money and time to find and hire a good franchise attorney to go over the small print, written in tiny print and in the right places in legalese gobbledy-gook. A good franchise attorney can help translate the agreements ramifications for you. It's nice to know that you are signing away your first born, especially when it can be written down so smoothly and innocently. Consider if the franchise agreement matches verbal promises. If it doesn't, alarms should be sounding loudly in your head. 
  • When it comes time to negotiate your franchise contract, you should know that there are many points that a franchisor will not want to negotiate, but my rule is that it never hurts to ask. Again, clarify the franchise contract. You should certainly think of negotiating territory, the transfer of the store to another franchisee without incurring trafer fees or changes in the agreement * The franchisor will probably want personal liability in the terms of the agreement. They might ask you to sign a personal guarantee of performance. Ouch! Work your tail off to limit your liability (a limited liability corporation?) in the agreement. No need to give away your wife when you don't have to. On second thought, maybe you want to do that.

That's my checklist. Read the book Franchising for Dummies to get a better handle on this and hire someone that really knows about the legalities -- a franchise attorney. Try not to look like you're made of money when you see these attorneys. I have known one or two to polish their scare stories in front of a client to make an additional buck or two. Look poor -- dressed in sack cloth and ashes -- in the hopes that their rate will go down out of pity. Nonetheless, a good attorney is a worthwhile investment, considering you are looking at plunking down tens to hundreds of thousands of dollars in starting your franchise.

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