Tag Archives: franchise law

Things to Consider Before Purchasing a Franchise

You should consider the following issues before committing to any purchase

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The “Standard” Agreement

Business transactions are best documented through the use of written agreements. However, the impression is often given that the offered agreement is a standard document, and no variations can occur. Many times this is the case. However, one cannot know if that is the case in your particular instance until attempts are made to negotiate those portions of the agreement which are most objectionable or have the greatest impact upon your ability to go forward with the transaction. A party’s willingness to negotiate is generally directly related to its perceived need to enter a particular marketplace or business alliance, competitive pressures existing in the market, and its perception of its then existing business relationships. While no assurance can be given as to the success or economic rewards of any negotiation attempts, a prudent business person should keep these facts in mind as he or she reviews all offered documents.

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Be Careful When Relying Upon a Franchisor’s Financial Performance Claims

Prospective franchisees have often been incorrectly told that federal law prohibits a franchisor from disclosing financial performance information to the prospect prior to his or her becoming a member of the franchise system. The revised Federal Trade Commission Franchise Rule now requires that franchisors clearly disclose they are legally permitted to provide financial performance information if they chose to do so. Only about 20% of franchisors made financial performance claims in 2006. Virtually all current disclosure documents and franchise agreements contain warnings that no one is authorized to make financial performance claims on behalf of the franchisor unless those claims have been included in the disclosure document, and also warn you not to rely upon any undisclosed claims if they have been made to you.

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Franchise Risks

One should fully read the franchise disclosure document to identify relative risks in the total transaction. Put in other words, what are the promises which are being made in return for your agreement to pay the initial and ongoing franchise fees, and what are the risks of those promises falling short of your expectations or their being broken? What obligations are you being asked to undertake, and how dependent are you upon achieving a perceived business goal in order to meet those obligations? To be sure, no business is risk-free. However, the franchise purchaser should remember that he or she is agreeing to pay significant sums of money for something. You should endeavor to determine what that “something” is, both as to perceived value and reasonable expectations.

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An Ounce of Prevention……

Franchised businesses and other business opportunities have become a major portion of the retail business environment in America. Contact us to ask for one of our free checklists of things to consider before purchasing a franchise or business opportunity, and things to do before offering a franchise or business opportunity for sale

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