Legal due diligence for buying a franchise

Your lawyer/advisor will review the franchise's legal documentation, including the franchise agreement and disclosure document, to ensure that there are no clauses or terms that would adversely affect your investment. He/she will also check that the company the franchisor has the necessary licenses to operate and has complied with all legal regulations regarding copyright, intellectual property, consumer protection and tax issues.

Overall, legal due diligence can be an important part of purchasing a franchise and can help reduce the financial and legal risk associated with this business decision.

 

 

You should ask the franchisor for a complete list of existing franchisees. This is important because it will give you a chance to contact a number of franchisees to discuss their franchise experience. We recommend that you talk to as many as you can, but at a minimum, talk to those who have similar territories to the one you're considering, as well as a selection of older and new franchisees. This will provide you with information on the medium and long term outlook for the business as well as current training and launch programmes.

 

You should ask franchisees about the support the franchisor provides in their business, as a successful support system is critical to your business and the entire franchise network.

 

 

You should ask the franchisor how many franchisees have left the network in the past three years. You should also ask the reasons why they left the network.

It is a red flag if a significant number of franchisees have left the network and the franchisor cannot provide a meaningful explanation as to why.

 

 

You should investigate the franchisor's business. In particular, you should review the franchisor's most recent accounts and ensure that they are in good financial standing. In addition, you should ask the franchisor to provide you with the commercial history and business history of the franchisor's directors.

 

 

You should check if there is a market for the product or service offered by the franchise. Is it national or only tested in certain regions? You should also evaluate the competition operating in the proposed territory.

 

We strongly recommend that you have your franchise agreement reviewed by an experienced franchise attorney/legal advisor. However, you should read and fully understand your agreement. In particular, you should ensure that the franchise agreement includes the following clauses:

 

Most franchise agreements will include a non-trust clause. This often states that you cannot rely on any pre-contractual statements or projections provided to you unless they are attached to the franchise agreement. You should therefore note down what statements were made that convinced you to buy the franchise. Ask the franchisor to sign it and attach it to the franchise agreement. It is important to ensure that everything the franchisor has told you and relied on is expressly stated in the franchise agreement.

 

To ensure that you can continue to run your business, you should check whether the franchise agreement gives you the right to renew the agreement at the end of the franchise period. This right will likely be subject to certain conditions, but these conditions should not be unreasonable.

 

You shouldn't have to pay the original fee again;

The renewal term should be the same length as the original term;

The terms of the renewal agreement should not be substantially more favorable than the original franchise agreement.

Selling your business

 

You should check whether the franchise agreement allows you to sell your business during the franchise period. The franchisor may impose certain conditions in the event of a sale, but you should confirm that these conditions are not unreasonable or difficult to meet and, in particular, that the transfer fee is not excessive. Common terms include selling to a new or existing franchisee, which requires you to use the franchisor's standard sales contract form and pay the franchisor's legal fees. You will not be allowed to sell the business uno independent operator outside the franchise.

 

Please note that the franchisor will likely have the right to transfer or assign its rights and obligations under the franchise agreement without your consent.

 

Obligations of the franchisor

 

The franchise agreement will impose many obligations on you as a franchisee, however, it is also just as important that the franchise agreement imposes obligations on the franchisor.

 

Common obligations of the franchisor include:

 

Providing initial training as well as additional training throughout the franchise;

Providing support for launching your business;

Provision of goods and services (if applicable);

They give you a copy of the manual.

Death/Disability

 

There should be a clause in the franchise agreements that governs what should happen if you were unable to carry on the business due to incapacity or death.

 

Typically, the franchisor will not allow the business to automatically transfer to beneficiaries without the franchisor's consent and ensuring that the person taking over the business meets the franchisor's current requirements.

 

The franchise agreement will contain provisions relating to termination. It is common practice that the franchisor has the express right to terminate the franchise agreement, but you do not.

 

The franchisor will likely have the right to terminate the franchise agreement if you breach any of the obligations, damage the goodwill associated with the franchise, are likely to be or become bankrupt, continue to be late in paying any fees due, threaten or cease trading, or fail to initial preparation.

 

 

You should find out if the franchisor is a member of the Romanian Franchise Association (ARF). If the franchisor is a member of the ARF, the franchisor must adhere to certain ethical franchising standards and in particular the ARF Guide to the Code of Ethics.