Franchise Agreements: Why You Need to Consult A Lawyer Before You Buy A Franchise.

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Franchise agreement with lawyer

Investing in a franchise is an exciting opportunity, but it comes with a multitude of legal intricacies, especially within the framework of a franchise agreement. We’ve outlined some of the legal considerations below so you can understand the importance of working with an experienced franchise lawyer. 

What is a Franchise?

A franchise is when a big company (the franchisor) lets someone else (the franchisee) use its name, products, and way of doing business for a fee. The franchisee runs the business, but the franchisor helps them with training and support to succeed. It’s important to note that the franchisor will have specific rules about how you market your business and use their name and trademarks.

The Significance of Franchise Agreements

A franchise agreement is a legally binding document that sets out the terms and conditions of the partnership between a franchisor and a franchisee. This detailed document covers different areas like business operations, fees, intellectual property rights, and what both parties are responsible for.

Prior to signing a franchise agreement or committing any funds to the franchisor, it is essential to seek advice from impartial legal and financial experts. Engage an independent franchise lawyer to examine all documents, contracts, and proposals. Make sure you understand the circumstances under which your agreement might be terminated, potentially resulting in the loss of your franchise. You should also know whether you possess the option to renew, considering that franchise agreements often have finite durations.

The Franchise Disclosure Document

The disclosure document, also known as the Franchise Disclosure Document (FDD), is a crucial document provided by the franchisor to potential franchisees. It contains comprehensive information about both the franchisor and the franchise offer. It is a mandatory requirement to give prospective franchisees 14 days to review the FDD. The details typically include:

  1. Franchisor Information:
    • Business background: History, structure, and experience of the franchisor.
    • Litigation history: Any past or pending legal actions involving the franchisor.
    • Bankruptcy or insolvency information: If the franchisor has undergone bankruptcy or insolvency proceedings.
    • Financial statements: Audited financial statements, including balance sheets, income statements, and cash flow statements.
  2. Franchise Offer Information:
    • Costs: Details of initial fees, ongoing royalties, and other financial obligations.
    • Copies of proposed franchise agreements: The legal documents outlining the terms and conditions of the franchise relationship.
    • Description of any exclusive territory: If the franchisee will have exclusive rights to operate within a certain geographic area.
    • Restrictions: Any obligations or limitations on the franchisee, such as supplier restrictions.
    • Franchisor’s policy on volume rebates: Information on any discounts or rebates provided based on sales volume.
    • Conditions of termination, contract renewal, and transfer of franchise: Terms related to ending the franchise agreement or transferring ownership.
    • Description of the franchisor’s mediation process: If mediation is used to resolve disputes between the franchisor and franchisee.
    • Training and other assistance programs: Details of the training and support provided by the franchisor.
    • Advertising funds: Information on any required contributions to advertising or marketing funds.
    • List of current and former franchisees: Contact information for current and former franchisees, allowing potential franchisees to gather additional insights into the franchise system.

This disclosure document is intended to provide potential franchisees with the information necessary to make an informed decision about investing in the franchise opportunity. It’s crucial for prospective franchisees to carefully review the FDD and seek legal and financial advice before entering into any franchise agreement.

Material changes. The franchisor is obligated to inform you of any significant changes, known as “material changes,” which could reasonably be expected to negatively impact the franchise’s value or influence your decision to purchase it. Before finalizing the agreement or making payments, the franchisor must disclose any such material changes that have occurred since you received the initial disclosure document.

Late or Incomplete Disclosure. If the disclosure document or a statement of material change is delayed or fails to meet the legal requirements, the franchisee retains the right to cancel the agreement without facing penalties or obligations for up to 60 days after receiving it. In the event that no disclosure document is provided, the franchisee has the option to cancel the agreement without penalty or obligation within two years of entering into the franchise agreement. If the franchisee suffers losses due to incomplete disclosure or misrepresentation in the disclosure documents, legal action for damages can be pursued.

Refund Policy. Upon cancellation of the contract, the franchisor is required to refund the franchisee’s money within 60 days.

Exemptions From Disclosing Financial Statements. Certain large and established franchisors may be exempt from providing financial statements if they meet specific criteria. It is advisable to seek advice from a lawyer or financial advisor regarding obtaining a report on the franchisor’s business information if financial statements are not provided.

Why It’s Important To Understand Your Franchise Agreement

Reviewing your franchise agreement and grasping its terms and conditions highlights the importance of seeking advice from a lawyer knowledgeable in franchise law. Some reasons why this agreement can become challenging are:

  • Legal Complexity: Franchise agreements often contain dense legal jargon that might be unfamiliar to prospective franchisees.
  • Financial Obligations: Understanding the financial commitments, such as initial fees, royalties, and other financial responsibilities, is vital for making well-informed decisions.
  • Operational Directives: The agreement outlines operational guidelines concerning daily activities, marketing approaches, and quality benchmarks, which significantly influence the franchisee’s business.

How An Experienced Franchise Lawyer Can Make Things Easier For You

Given the complexities of franchise agreements, seeking legal assistance is incredibly important. Consider the following key reasons why consulting with a Franchise Agreement Review Lawyer can be invaluable:

Legal Clarity

A Franchise Lawyer clarifies the legal terms within the agreement, ensuring you comprehend your rights, responsibilities, and any potential risks involved in the franchise venture.

Financial Assessment

Understanding the financial components is crucial. A lawyer examines the financial obligations outlined in the agreement, assisting you in evaluating the economic viability of the franchise and avoiding unforeseen financial strains.

Compliance Assurance

Franchise agreements are subject to various regulations. A lawyer verifies that the agreement adheres to relevant laws and regulations, safeguarding you from legal complications in the future.

Negotiation Assistance

Should negotiation be necessary for certain agreement aspects, a lawyer advocates on your behalf. They can negotiate to secure more favourable terms and address any concerns you may have.

Risk Management

Identifying potential risks is essential during the review process. A lawyer helps you recognize and manage risks associated with the franchise, ensuring you enter the agreement with a clear understanding of potential challenges.

Be Sure To Get Expert Legal Advice When Buying A Franchise

At Hukam Law, we have a deep understanding of the intricacies involved in franchise agreements. We offer the experience and expertise you require with thoroughness and attention to details when reviewing your franchise agreement. In addition to our vast franchising expertise, we prioritize informing our clients about their contractual rights and obligations.

If you’re in the first stages of buying a franchise, give us a call 📞 at 705-915-0884, or send us an email at info@hukamlaw.ca, and we’ll make sure that you have the representation you need in your business transaction.

***The information provided in this blog is for general informational purposes only and should not be construed as legal advice. If you have legal questions, we strongly advise you to contact us.