Legal Aspects of Buying
a Franchise
Copyright
Gary R. Duvall
Dorsey & Whitney LLP
January 2012
Benefits of Franchising to Franchisee
1.
Training and Assistance
2.
Trademark and Advertising
3.
Reduction of Risk
4.
Bulk Buying Discounts
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Risks to Franchisee
1. Business Management
Aptitude Needed
2.
Working Capital Needed
3. Working with the Franchisor
and Franchisor's System
4. Competition and Normal
Business Risk Factors
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Benefits to Franchisor
1. Franchisee Provided Capital
Shares Financial Risk and Fuels
Growth
2.
Profit Motive of Franchisee
3. Enhancement of Franchisor's
Trademark Good Will
4. Franchise Fee and Royalty and
Indirect Income
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Risks to Franchisor
1. Shares Store Level Profit with
Franchisee
2. Franchisees Have Long Term
Agreement
3. Franchise Law Compliance
Creates Risk and Expense
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LEGAL ISSUES TO LOOK FOR IN A
FRANCHISE: FDD Items
Prospect must receive the FDD 14
calendar days (and in some states
10 business days) before
investing or signing an agreement.
We provide a half-day tailored
franchise legal compliance
program for franchisors for $2000,
with no cost for travel.
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LEGAL ISSUES TO LOOK FOR (p 2)
Franchisees' Earnings Record, Item 19
of FDD (used by about 30% of
franchisors)
For a prospect to build a proforma, he
or she can also use FDD Items 6, 7,
and 21, other franchisor Item 19s, and
industry financial ratios, and contact
current and former franchisees
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LEGAL ISSUES TO LOOK FOR (p 3)
Franchisees' Turnover, Closures
and Transfers, Item 20 of FDD
And contact current franchisees
for validation, and former
franchisees for reasons for
turnover and how to avoid failure
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LEGAL ISSUES TO LOOK FOR (p 4)
Franchisor's Experience,
Background of Franchisor
Managers, Litigation, and
Bankruptcy, Items 1 through 4 of
FDD
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LEGAL ISSUES TO LOOK FOR (p 5)
Required Purchases, Amounts of
Franchisor Supplier Rebates, Item
8 of FDD
Franchisor's Training and Initial
and Ongoing Support, Item 11 of
FDD
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Other Key Legal Issues, FDD sections:
Item 12: Exclusive Territory
Items 13 and 14: Franchisor's
Trademark,
Copyrights, or Patents
Item 16: Restrictions on Goods or
Services Offered
Item 17: Term, Renewal, and Sale
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Other Information Not in FDD:
a. Ownership of Franchisor
b. Creditworthiness of Franchisor
c. Competition in the Industry, Average
Profits, Financial Ratio Studies
d. Economic Health of Industry, Short
and Long Term
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Seek a Franchise Lawyer’s Advice for:
• Review FDD and Agreement
• Explain legal rights, obligations
• Benchmark key aspects to
others
A franchise law specialist will
cost less!
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Cost of Agreement Evaluation (p 2)
For prospect, an oral report is
$1,300.
Subtract: $300 for franchisees
working with an experienced
franchise consultant.
Add: $500 for written report; $500
for area developer; $1,000 for area
rep or subfranchise.
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Franchise Agreement Evaluation (p 3)
For the flat fee we:
• spot key legal issues in the franchise agreement;
• compare it to customary franchise agreements,
both negatives and positives;
• While we do not guarantee that we will identify
all matters, our clients frequently comment on
our thoroughness.
• We understand that most franchisors will not
agree to amendments. We don’t waste the
parties’ time with lengthy requests for changes
on routine provisions!
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Post-Agreement:
CHOICE OF BUSINESS ENTITY
A. Sole Proprietorship
B. General Partnership
C. Limited Partnership
D. Corporations
E. Limited Liability Companies
We advise on costs and benefits of these
and other entities.
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Post-Agreement:
CHOICE OF BUSINESS ENTITY (p 2)
Our services include formation
of entity for one owner (or H
and W), which includes charter,
minutes, bylaws, shares, initial
report - $1,500 (plus filing fee).
Separate fees apply for other
governmental registrations and
requirements.
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Post-Agreement:
Lease Evaluation and Negotiations
Our services for lease evaluation for
prospective tenant and written
report are $2,000. (Add $500
for each personal guaranty or other
agreement). Negotiations are
charged hourly.
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Post-Agreement:
Franchisee Financing Legal Issues
Possible Assets Financed
1. Franchise Fee
2. Inventory
3. Equipment and Improvements
4. Real Estate
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Post-Agreement:
Financing Legal Issues (p 2)
1. Franchisor as Direct Lender
2. Franchisor-assisted financing
3. Pure Third-party financing
Item 10 FDD discloses franchisors’
provided or arranged financing
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Thank You
Gary R. Duvall
Co-Chair, Franchise & Distribution Group
Dorsey & Whitney LLP
206.903.8700
duvall.gary@dorsey.com