This is an expensive business proposition, so it’s important to make sure the franchisee has the relevant information to make an informed business decision.
A clear understanding of the risk, and the potential rewards (as well as the liability), is key, and an experienced franchise lawyer can assist the franchisee with this analysis.
The franchisee needs to be well-informed about the financial and legal risks of a franchise in order to make a sound business decision about the viability of an investment, of money and effort, into the franchisor’s system.
The government wants to make sure that the franchisee has the ability to get this information so it can make an informed decision, and so has created rules about the length of the term of the franchise and rules about transferring, cancelling or not renewing a franchise, which the franchisor must follow in order to comply with law.
The franchisee’s franchise attorney can assist in reviewing and understanding the financial and legal risks the franchisee will take on, and assist with business operations of the franchisee’s operation.
The most important thing for the franchisor, when preparing to enter a franchise agreement, is to disclose all of the information a potential franchisee needs to make a determination regarding the viability of the investment.
The most important thing the franchisee can do is to evaluate the information provided, with the assistance of the franchise attorney and other team members, to assess all of the disclosed information and to do additional intelligence gathering, to decide if the investment is one to make.
The franchisee’s lack of due diligence isn’t an excuse for making a bad investment decision.
The franchisor will perform its diligence on the potential franchisee, and has invested in its legal team to protect the franchisor’s own interest, so the franchisee is advised to do the same.
An investment at the beginning of the process in legal and financial examination will help make sure the potential franchisee understands what is in the documents, the potential risks and rewards, both personally and professionally, and creates a better ability to make a good decision.
By law, neither party can waive the disclosure or the minimum time period granted to the franchisee to examine all of the disclosed information, which is an indication of how important these disclosures, and the review of the disclosed information, really is.
The franchisor should understand that a franchise is not a “business in a box”, or a source of passive income. A successful franchise is better referred to as a “system in a box,” which the franchisee must actively implement and continually monitor and be involved in to be successful and profitable.
It’s not a one-time decision, but a series of decisions regarding the continuation of the business, and having a knowledgeable and experienced franchise attorney can help with the more complicated or legal decisions the business operator will have to make.
The franchise also needs to be run in a manner compliant with law; the franchisor may terminate the franchisee’s operation if it is not in compliance, but the franchisee doesn’t have the same remedies if it feels the franchisor isn’t being compliant.
Again, the franchise attorney can help the franchisee evaluate and determine the best course of action for compliant and successful business operations.
I hope this information has been helpful. I’m Jenna Zebrowski, and I’m a real estate lease lawyer, but I’m not your lawyer yet. This information is provided not as specific counsel, but as general information to help you make an informed decision about your commercial lease. Remember, hiring a lease lawyer in often much cheaper than getting in a bad business situation. Give me a call if I can help (817) 841-5762.
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