When it comes down to it, purchasing a franchise is not like opening or starting any other type of business. For one thing, much of the business is already set up for you, so it is almost like you are opening a ready-made company. While this may seem easier than starting a business from scratch, there are still a lot of legal considerations you want to make. Becoming a franchisee of a large business – with multiple different locations – is like becoming an ambassador. If you make some basic missteps, you could not only be out of a business and a job, but you could also be sued. Here are five legal factors to consider when purchasing a franchise business.
1. Are the terms in the contract favorable?
When you open a franchise, you are usually required to pay a monthly fee and share of the profits – this money goes to the main parent company that owns all the franchises. In some instances, this fee may be exorbitantly high. Before you sign the contract, you want to make sure that you aren’t signing away your life. The last thing you want is to become a poorly compensated cog in a giant corporate machine.
2. Are you going to file as a sole proprietor or as a limited liability company?
Another critical factor you need to consider is what type of business or corporate structure do you need to be organized as. In some instances, you may only need a sole proprietor’s license. In other instances, you will need an LLC. It also depends on what type of liability protection you get from the parent company. If a customer burns his or herself, you don’t want to lose your house as a result of a major lawsuit.
Can you sell the franchise when you want or do you have to ask permission of the parent company? Sometimes, a franchisee has a lot more freedom – they can sell when they want. However, other franchisees don’t have a lot of freedom. If you don’t feel like you want to be tied down to such a restrictive policy, you may want to go with a company that is a little laxer. The last thing you want is to get sued if you break your contract.
4. What are some of the intellectual property rules and regulations?
Most franchises have a registered name, logo and more – they may also have trademarked recipes. Ideally, you want to know what some of these intellectual property rules are, so you can know how to market and advertise your business accordingly. You don’t want to alter logos and other intellectual information, because you could find yourself in hot water.
5. Are you buying into any debt?
Sometimes, a franchisee accidentally buys into a sinking ship. Ideally, you want to look at a parent company’s financial directives and public filing information before you become an official franchisee. You can find much of this information when you visit franchise Expo – a directory that helps individuals find the perfect franchise. In the end, you don’t want to buy into a company’s debt and you don’t want to see your money go down the drain.