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Before you sign on the dotted line, it is important to understand the key legal aspects of buying a franchise. Luckily, that’s where franchise attorneys come into play.&nbsp;For a better understanding of what to expect, here’s an overview of what a franchise attorney does and legal terms to understand.<h3>The Role of a Franchise Attorney</h3>Like in almost any transaction, the role of an effective franchise attorney is to help a client maximize the upside and limit the downside, identify and analyze risks, and manage expectations.&nbsp;“This is no different when the attorney is advising a prospective franchisee, whether it is their first franchise purchase, or if they are an experienced multi-unit operator,” said&nbsp;<a href="https://www.linkedin.com/in/justin-m-klein-9a175b8/?utm_source=1851franchise.com&utm_medium=article&utm_campaign=the-legal-aspect-of-buying-a-franchise-what-you-need-to-know-2723888" target="_blank" rel="nofollow">Justin Klein,&nbsp;</a>franchise and business attorney at Marks &amp; Klein. “Our philosophy, no matter how sophisticated of a franchise investor we are representing, is to never tell a client they should or should not proceed with a potential investment … [Rather] arm them with as many tools and as much information as we can for them to make an informed decision.”&nbsp;<h3>Legal Factors to Know</h3><a href="https://1851franchise.com/top-franchise-lawyers-justin-klein-of-marks-klein-2713554#stories">Klein</a> said that some critical things to understand include: impact of signing a personal guaranty; non-competes or restrictive covenants; default and termination provisions; transfer rights; and open ended contractual provisions.<ul><li>Personal Guaranty</li></ul>In the event a franchised business is owned by an entity (like an LLC), franchisors will typically require that one or more of the principals of that entity “guaranty” the performance of the entity. Such obligations may include guaranteeing payment obligations, performance obligations such as confidentiality or non-competes, or legal obligations like indemnification.&nbsp;<ul><li>Non-Compete/Restrictive Covenant</li></ul>Non-compete provisions and other restrictive covenants, such as non-solicitation provisions, are common in franchise agreements. Klein noted that it is important for a prospective franchisee to understand what these types of provisions mean, how they work and how it may affect them, especially if an opportunity does not work out as planned and an early termination is necessary.&nbsp;<ul><li>Default and Termination Provisions</li></ul>“One of the more overlooked provisions by prospective franchisees, when evaluating a franchise opportunity, are default and termination provisions,” said Klein. “It is imperative to understand what conduct is not acceptable to a franchisor, what amounts to a default and … not only understand but to appreciate any applicable cure periods for any alleged defaults to avoid termination.”It is also equally important to understand a franchisor’s grounds for termination and what penalties or post-termination obligations may exist. For example, there may be penalty provisions that state a franchisor may charge a fee in the event of default, or provisions that permit a franchisor to limit or eliminate territorial exclusivity in the event of default.&nbsp;<ul><li>Transfer Provisions</li></ul>Franchisees should also understand their rights to transfer a franchised business.&nbsp;“The transfer of a franchised business is subject to franchisor approval,” said Klein. “As such, it is important to know the conditions and prerequisites for a transfer to be effectuated. For example, franchisors often charge transfer fees, which can be substantial.”<ul><li>Open-Ended Contractual Provisions</li></ul>Know that there are many provisions in a franchise agreement that are open-ended. For example, a franchise agreement may include a fee that has not currently been charged but “one may be charged in the future,” Klein pointed out.&nbsp;“Franchisees need to be acutely aware that there may be required changes to the business that they initially bought into, which can oftentimes cost significant capital expenditures, staffing changes and modifications to operating procedures to which they had been accustomed,” said Klein.&nbsp;<h3>The Importance of Due Diligence</h3>The more due diligence a franchisee performs, the more informed of a decision they can make.&nbsp;“Of course, at some point a decision needs to be made to proceed or not, however, no stone should be left unturned,” said Klein. “Contacting as many franchisees as possible, including those currently operating, terminated or [who] have left the system, and those [who] have not yet opened that are listed in Item 20 of the franchise disclosure document is a manageable way of gaining a plethora of information about the franchisor and the investment.”There’s no doubt that the legal aspect of franchising can be a lot to take in. But working with an experienced franchise attorney can make it easier. These professionals can not only guide prospective franchisees through their due diligence process by advising what types of information to seek out, but also help filter through and distill any information received — or not received.&nbsp;

The Legal Aspect of Buying a Franchise: What You Need to Know

1851 Franchise

In franchising, it is important to understand legal issues such as personal guaranty, non-compete agreements and termination provisions. 

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