Like any business venture or major purchase, buying a franchise can be a bit confusing with the technical and legal jargon thrown around. If you have never bought into one before, you may not know about the legal obligations it entails. We are here to tell you what you need to know and what you should expect (legal wise) when you purchase a franchise.
Important Legal Documents for Buying Franchises
There are two main legal documents surrounding franchises. First, is the disclosure document. The disclosure document provides prospective franchisees with a ton of information about the franchise system, the franchisors, and any agreements they must sign. The purpose of this document is to help you make an informed decision about investing or not investing in a particular franchise.
A disclosure document will include information about the franchisor, the key staff of the company, the management’s experience in franchise management, the franchisor’s bankruptcy history, upfront and ongoing fees involved in running the business, territory rights, responsibilities, etc. With this document, an individual will be more than able to determine if a particular franchise will be a wise investment opportunity for them.
Receipt of a disclosure document is governed by a time limitation rule. This rule allows for a cooling-off period in which the prospective franchisee has a certain amount of time to consider the document and make their decision. Once this time period is over, a decision must be made.
Contracts are Binding
The second important legal document is the franchise agreement, which is a contract that outlines the conditions and terms of a franchise arrangement. This agreement is much more specific than a disclosure document. It includes information about the franchise system (use of trademarks and products), territory, rights and obligations of each party, term of the franchise, payments, training and advertising, and termination or transfer rights of the business.
The franchise agreement is a legal document that will govern the franchisee and franchisor relationship. This agreement should be reviewed closely and taken to a franchise lawyer, like Juriscorp Law Offices, to be looked over before making a final decision. Once it is signed, both parties must honour it. That’s why it’s key to have a lawyer review it first.
Contractual Obligations When Buying a Franchise
Once everything has been signed, you’re free to start up your franchise. Put the open sign up, hire your staff, and start advertising. While you’re running it, though, there are still contractual obligations you must be aware of, specifically regarding terminations and renewals.
Franchise contracts aren’t forever. They only last for the number of years stated in the contract you signed. If you don’t comply with your contract, you can lose the right to your franchise. A franchisor can end your agreement for several reasons such as failing to abide by specific standards or sales restrictions or failing to pay royalties. In the contract, you may have a chance to fix your first failure like making one late payment. However, the contract will keep the right to terminate your franchise for other failures.
Franchise agreements can run for decades, but it’s critical to note that they don’t auto renew. When the agreement comes to a close, the franchisor can decline the offer to renew or impose different terms and conditions. They may raise royalty payments or reduce your territory. Any changes may result in increased costs or reduced profits.
When you purchase a franchise, there are two main legal documents you need to comb through carefully: the disclosure document and the franchise agreement. The first will give you information pertaining to the franchise and will help you make an informed decision. The second will specifically state your obligations as a franchisee.