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Buying a Franchise or Franchised Business

Guest post by: Philip Chapman

Article Overview: Some important Considerations in Acquiring a Franchise, Starting a New Franchised Business or Purchasing an Existing Franchised Business.

Buying a Franchise or Franchised Business

1. Issues Involved in the Choice of Form of Entity



· Don't use a sole proprietorship or general partnership.

· Discuss with your lawyer and accountant the pros and cons of using a

“C” Corporation, an “S” Corporation or a limited liability company.

2. Selection of a Lawyer and the Lawyer's Role



· Select a lawyer who is experience in representing Franchisees and in buying a franchise and if applicable, in buying an existing franchised business

· If the business is to be conducted from a location other than your home, the lawer should

be well experienced in leasing of real estate.

· The lawyer’s role with respect to the franchise aspect of the transaction is to review the Offering Circular and the Franchise Agreement and other exhibits thereto and to advise of the principal issues therein and what is or is not “negotiable”

* right of Franchisee to cancel before or after the taking of training and

ability to obtain at least a partial refund of the up-front franchise fee



* length of initial term and its commencement date

* right of renewal and conditions thereon

* the "Territory" and scope of protection of Franchisee from the

activities of the Franchisor and other Franchisees

* conditions to right of Franchisee to sell the business or to sell a

portion of the ownership

* effect of death or disability of the principal of the Franchisee

* extent of the personal guaranty of the principal of the Franchisee

* exclusion of any liability of Franchisee and guarantor for

royalties for the balance of the term after franchisor

terminates because of default by Franchisee

* limits, if any, on absolute discretion of Franchisor to

refuse to grant consents or approvals

* restrictions on competitive activities of the Franchisee

or its Principal(s) after termination

* significance of litigation disclosed in the Offering

*designation of state where litigation or

arbitration must take place

* reimbursement for expenses incurred by Franchisee because

of subsequent change of Franchisor's trade name

* obligation of Franchisor to indemnify, hold harmless and

defend in the first instance third party challenges to

Franchisee's use of Franchisor's intellectual property

* right to use Franchisor's software, plus future updates,

after Franchisee's rightful termination of the Franchise

Agreement because of default by Franchisor



3. Due Diligence by the Franchisee



It is an absolute necessity for the client to visit and confer with other Franchisees.



4. Selection of an Accountant; Pro-Forma Cash Flow Projections

Scope of Services and Form of Financial Statements



· Select an experienced business accountant—and for the acquisition of an existing business this should be immediately.

· Prepare with the assistance of the accountant a conservative pro-forma cash

flow projection

· At the outset engage the accountant to generate “review” statements and not merely to

review your compilation statements

6. Some of the Major Issues in the Lease

* the "use" clause should not be too restrictive, to allow for changes in the goods and/or services offered by Franchisee over a period of time

* length of initial term and commencement date-the initial term plus the first right of renewal should cover at least the length of the initial term of the franchise---.and the commencement of the initial term of the Lease should be synchronized with the commencement of the initial term or at least the expiration of the initial term of the franchise agreement

* Tenant's having sufficient option (s) to renew

* whether fixed rent commences immediately or tenant gets a rent concession against the first month or first few months

* Tenant's responsibilities for taxes and common area maintenance expenses

* security deposit: amount and form (cash or letter of credit)

* extent of personal guaranty--can it be limited rather than have it extend for the entire life of the lease

* bargain for the right of Tenant to assign the lease if it sells its business without the Landlord's consent or with consent not to be unreasonably conditioned, delayed or withheld. delayed.

* bargain for a general provision that wherever the consent or approval of the Landlord is required, such must not be unreasonably conditioned, delayed or withheld

* get a clear delineation of the Tenant's signage on the building and pylons

* try to get Landlord to agree to subordinate Landlord's right of distraint to the lien of a bank providing financing for the business

7. Choice of an Insurance Advisor



* role of the insurance advisor-the Franchisee should not rely solely on an insurance agency recommended by Franchisor

8. Compliance with Laws as to Withholding, etc. and Other Taxes



* use of payroll services-dangers of non-compliance with technical requirements

* confer with the Franchisor and an accountant concerning liability for sales or excise taxes in home state and other

states and income taxes in other states

9. After Commencement of Operations-Compliance with Laws as to Withholding, etc.

and Sales Taxes



* use of payroll services because of the dangers of non-compliance with IRS filing requirements

* conferring with the Franchisor and an accountant as to obligation of Franchisee to collect sales or excise taxes for NJ and out of state sales

Related Articles
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  Why are Franchises so Successful?
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  Franchise Resales
  What is a Franchise?
  Questions to Ask a Franchisor When Buying a Franchise
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  The Six things you must have to buy a Franchise
  A Research Report: Good Reasons for Buying a Franchise Business
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  From the Publisher: Kids & Pets
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  Make the Most of the Franchise Agreement
  Owning a franchise is a great way to become your own boss.
  Reasons Not To Buy A Franchise Debunked

Article Tags: buying a franchise, franchised business



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