Top 10 Things A Potential Franchisee Should Know About A Franchise Offering
- Is it registered in the State of Virginia? All franchises legally sold in the State of Virginia must be registered with the Retail Franchise Division of the State Corporation Commission. You can check a franchisor’s registration status online at www.scc.virginia.gov.
- Do the franchisor’s other franchisees recommend the franchise? Check with a large number of the franchisor’s other, preferably local, franchisees. If other franchisees are happy, chances are that you will be happy too.
- Do the written documents match what you have been told by the franchisor? Typically, a court will only enforce the written claims in the Franchise Disclosure Document (“FDD”) or the franchise agreement. If your franchisor makes claims that are not supported by the written franchise documents, this is a clear danger signal to be discussed both with the franchisor and any professional advisors (lawyer and accountant) you may have retained.
- Do you have the right to renew the franchise? What additional fees and expenses will you pay? You should inquire regarding your right to renew the franchise and at what additional expense. Otherwise, after spending five or ten years building a thriving business, you may be unpleasantly surprised to find that you have either no rights to renew or rights to renew that require significant additional payments.
- Do the franchise documents require you to litigate or arbitrate disputes out of state? Out of state litigation or arbitration is almost always more expensive, time-consuming and troublesome than resolving a dispute locally. While these provisions are rarely waived by franchisors, you need to be aware of what your obligations will be in the event a dispute arises.
- Precisely what help is the franchisor contractually obligated to give you? The FDD states that the franchisor is only required to give you the assistance specifically stated in the FDD and the written franchise agreement. This assistance may differ, sometimes substantially, from what you are told by the franchisor. These discrepancies should be explored with the franchisor and your professional advisors.
- Can you sell your franchise? If so, on what terms? Franchise agreements almost universally restrict sales (transfers) to substitute franchisees approved by the franchisor and impose conditions on the transfer. These provisions may restrict the free transfer of your franchise to a potential purchaser and can cost you significant time and money.
- What is the franchisor’s track record? The FDD requires the franchisor to disclose material litigation, any prior bankruptcy of the franchisor or its principals, and the names, addresses and telephone numbers of terminated or non-renewing franchisees. (Don’t forget to speak to those who have failed or not renewed, if possible, to find out why.) This information is a potential gold mine, allowing you to learn of the franchisor’s past track record.
- Does the franchisor make any financial performance representation? Any financial performance representation (e.g. – you will net $100,000 per year) must be specifically disclosed in Item 19 of the FDD. Otherwise, the franchisor may not legally make any financial performance representation, and you will not be entitled to rely on such claims, in the event they prove incorrect.
- Have you conducted your own due diligence? There are a number of very good resources explaining, in greater detail, how to conduct your due diligence of a potential franchise offering. Some of these resources are collected at kaufCAN.com. I also strongly recommend hiring a franchise lawyer to review the FDD and franchise agreement.
Stephen E. Story is a member in the law firm of Kaufman & Canoles, where he chairs its Franchise Practice Group and specializes in representing franchisors and franchisees. He has been named a “Legal Eagle” twice by Franchise Times Magazine, most recently in 2019. Mr. Story can be reached at (757) 624-3257 or firstname.lastname@example.org.
The contents of this publication are intended for general information only and should not be construed as legal advice or a legal opinion on specific facts and circumstances. Copyright 2022.