Business Law Notes

Winter 2004 Edition

BUYING A FRANCHISE (Part one of a series)

By M. Blen Gee, Jr.

The best legal advice that can be given to someone considering purchasing or opening a franchised business is to do a thorough due diligence investigation of the business issues first. If you are looking to acquire a franchise from one of the larger and better known franchisors, you can expect all but the most minor legal issues to be non-negotiable. For smaller and lesserknown franchises, you may have more negotiating leverage on legal issues, but you will also be dealing with a franchise that has weaker trademarks, little or no track record and no real security that the franchise will even be around in a few years. So, the best legal advice is to do your business analysis first and do it thoroughly. Here are some key points for your business investigation:

• Talk to as many other franchisees as possible. Visit their operations. Do not just visit the franchisees recommended by the franchisor.
• Is there a franchisee association for your brand? A franchisee association can be a great resource. Also, the existence of a franchisee association means more bargaining leverage with the franchisor.
• Exclusive Territory and Encroachment – Does the franchisor give you an exclusive territory and is the territory sufficiently large? Is there any protection from internet and catalogue sales into your market?
• Collective Buying – Franchisees can benefit tremendously from a franchisor’s ability to obtain volume discounts for its franchisees. However, be certain that the franchisor consistently passes on these discounts to the franchisees and does not favor its own company owned stores.
• Collective Advertising – This is a huge issue in franchising. You will almost certainly be required to pay into an advertising fund. How is this money used? Do other franchi sees consider the advertising effective and evenly distributed? Will your proposed franchise be in an area benefitting from national and local collective advertising?
• What immediate, upfront benefits does the purchase of a franchise entitle you to? Training? Site selection and lease negotiations? Start-up assistance? Marketing assistance and marketing materials?
• Is there a long-term commitment by the franchisor to franchisee support?
• What is your franchisor’s track history? Is the franchisor frequently involved in litigation with franchisees? Has the franchisor lost large numbers of franchisees? Is the franchisor financially healthy?
• Does the franchisor enforce quality and uniformity standards?
• Will the franchisor negotiate modifications of its standard franchise agreement?

Run the Numbers – Look carefully at earnings claims. Sit down with your CPA and see if it all makes financial sense for you. Additional information can be obtained from the American Franchisee Assoc. (http://www.franchisee.org) and the American Association of Franchisees and Dealers (http://www.aafd.org). When you feel that you have finished your business due diligence evaluation, take your Uniform Franchise Offering Circular (UFOC) and the proposed franchise agreement and make an appointment with your business attorney.

>> Read part two of our series on Buying a Franchise

About our Author:

M. Blen Gee, Jr. is an honors graduate of the University of North Carolina School of Law. His areas of concentration include business and corporate law, including sales of businesses; business litigation, including arbitration and mediation; franchise law; automobile dealer law; and insurance company insolvency. Mr. Gee has earned the highest peer-review rating for professional excellence and ethical standards by the national publication Martindale Hubbell.

DISCLAIMER: Johnson, Hearn, Vinegar & Gee, PLLC, provides this newsletter for general information only. The materials contained herein may not reflect the most current legal developments. Such material does not constitute legal advice, and no person should act or refrain from acting on the basis of any information contained In this newsletter without seeking appropriate legal or other professional advice on their particular circumstances. Johnson, Hearn, Vinegar & Gee, PLLC and all contributing authors expressly disclaim all liability to any person with respect to the contents of this newsletter, and with respect to any act or failure to act made in reliance on any material contained herein. Distribution of this newsletter does not create or constitute an attorney-client relationship between the firm and any reader or user of such information.

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