I am purchasing a franchise that will be located in Texas, but I have tons of questions:
- Do I form LLC or corporation?
- Can a franchise attorney assist with negotiations of the fees? with the franchise agreement itself?
- What are the top 5 things I should be aware of before buying a franchise? (risks vs rewards)
That's good -- you should be asking a lot of questions! And there will be too many to answer in this summary forum. I advise you strongly to sit down and meet with an experienced franchise attorney, preferrably a local one in Texas. That attorney can answer the questions you have listed and more, and further should take your Franchise Disclosure Document (FDD) package and go through it all, and then meet with you again to discuss it in detail and answer further questions. This is an extremely important step to take before making your purchase, and you are acting prudently in doing so. You should be able to locate an attorney through the search features of this site (www.avvo.com). More information is available through the Federal Trade Commission, at www.ftc.gov. Best of luck to you!
Those are some of the issues that an experienced franchise lawyer can assist you with in connection with the purchase of this franchise. Of course, you would want a thorough review of the FDD and any ancillary materials. These issues cannot be dealt with in this forum; you need to sit with counsel and have a full and frank discussion. The investment in securing the sevices of an experienced attorney when compared to the overall cost of the franchise is small, but the rewards are great.
A franchise attorney will be able to help you evaluate the franchise opportunity, discuss the point out concerns and important information that a prospective franchisee should know, assist with the general due diligence, recommend provisions that should be negotiated and negotiate them for the prospective franchisee, assist with advice about forming a separate legal entity, etc.
In answer to your specific questions you should form an LLC or corporation to run the franchised business. There are tax differences between these two entities and you should have the advice of counsel and an accountant.
As far as negotiating the fees of the franchise, typically these are not negotiable unless the franchise is a new start-up franchise. However, there are provisions that are negotiable and clarifications that may be made to most franchise agreements.
In answer to your last question, I would recommend you read some of my blog posts. I have put a link to one of them with this answer - Key Provisions of the FDD Every Prospective Franchisee Should Know. I have many other articles, blogs and other information on my website, www.spadealaw.com. Please feel free to call me if you are interested in discussing any of this information and/or our services and flat fees for those services (215-525-1165 x101).
This response does not create an attorney-client relationship and is not intended to provide legal advice for your specific situation.
Asking questions is definitely a good start. You really should talk with an attorney and even a financial adviser or accountant. It's much better to spend the small amount of money up front to avoid a potential significant cost down the road. It's usually a big investment getting into a franchise so you really want to make sure up front you are doing the right thing. No one can answer your questions in this forum as franchises vary by there terms and opportunities. But there are many qualified franchise attorneys here to choose from
Dear Dallas, TX:
You are on the right track in seeking legal advice. I recommend that you obtain the advice and counsel of an attorney with substantial experience in franchise law. Many general practitioners do not have the skills necessary to evaluate and negotiate a franchise relationship. If you would like assistance, please feel free to contact me off-line.
You should form some sort of entity for your franchised business. Whether you form an LLC or a corporation is a decision that will need to be made after discussing your particular circumstances with both legal and accounting advisors. The tax consequences are different.
A good franchise attorney can assist in negotiating the terms and conditions of your franchise. Whether those negotiations are successful will depend in large part on the franchisor. Some well established franchisors do not negotiate fees, as it is important for those to be uniform. This is not always the case, however, and you should not hesitate to make the request, especially if the franchisor has negotiated fees in the past or is a newer franchisor.
There are many more than five factors that you should discuss with your franchise counsel, and the risks and rewards will vary depending on the disclosures and agreements presented to you by the franchisor. A few of the top items that come to mind are: (1) personal guarantees: most franchisors require some sort of personal guarantee be signed by you. You will want to negotiate this point, and at the very least have competent counsel carefully evaluate the agreement to ensure that you aren't guaranteeing a revenue stream to the franchisor in the event the franchise fails or is terminated; (2) exclusivity/territory: you will need competent counsel to carefully evaluate and explain your rights to an exclusive territory and what if any rights the franchisor has in or near your territory; (3) relationships with other franchisees: You should contact many, many existing franchisees and ask about the relationship with the franchisor (use the list in the FDD; not just recommendations from the franchisor); (4) training and support: one of the big benefits of franchising is that you are generally buying an established system where someone else has worked out the bugs. you will want to ensure that you are receiving adequate training and support and that all the bugs are truly worked out of the system. Ask the existing franchisees these questions; (5) Noncompetition: most franchisors require some form of noncompetition agreement. You will need competent counsel to carefully evaluate these provisions and discuss your particular circumstances. This is a big area that often needs to be negotiated.
This response is not intended as legal advice or to establish an attorney-client relationship. It is for informational purposes only.
The number one reason to choose a franchise lawyer: They will save you money!
A franchise attorney can direct/guide you to the areas of the franchise agreement that are the most important to negotiate and whether or not a franchisor is likely to negotiate certain provisions. Other attorneys who are not as familiar with the franchise world may waste time and money trying to negotiate things that it is unlikely a franchisor will ever negotiate and may miss some of the big areas of concern.
Additionally, a franchisor is more likely to positively respond to a franchise attorney who is knowledgeable about franchising, because the franchise attorney already understands the perspective of both the franchisor and the franchisee.
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You should consult with a local business attorney to get these questions answered. It is often a good idea to have the protection of a business entity when purchasing a franchise.
There are more than 5 things to be aware of when purchasing a franchise. There are more like 500 things to be aware of - a lawyer can assist you with due diligence and other parts of the franchise acquisition process.
This general opinion is for informational / public educational purposes only. It DOES NOT create an attorney-client relationship. No communication can ever replace the specific advice of a lawyer who you have hired to represent you. Each person's situation is different, and additional facts can change legal outcomes. You should consult privately with a lawyer if you have a question about a legal dispute.