Read Before You Sign The Franchise Agreement
Category: Buying a Business
Do Not Sign The Franchise Agreement Unless You Fully Understand It
If you are planning to purchase a franchise, there is a significant amount of information to process prior to signing on the dotted line. The good 53 is that the Franchise Disclosure Document, or FDD for short, provides a vast amount of information that will help you to make an informed decision. You may or may not know this fact, but the Federal Trade Commission requires all franchisors to provide a copy of their current FDD to each and every applicant no less than 14 days prior to the sale of the franchise. That being stated, potential franchise buyers should always perform their due diligence and take their time reviewing all of the documents in order to make an informed buying decision. The FDD contains twenty-three mandatory sections that display information regarding costs, fees, legal issues, and turnover rates to name just a few. The FDD can be lengthy, technical, and tedious, particularly for entrepreneurs that are new to the world of franchising. Unfortunately, a great deal of franchise buyers fail to read or fully understand the FDD. Many end up signing the Franchise Agreement only to discover that they are not getting the deal they thought they were. At this point, you are legally bound. In essence, it is too late to get out of the situation. However, there is help available to guide you into making a good business decision. Since the FDD is a legal document, it is important for you to work with a business broker that specializes in representing franchise buyers. An experienced business broker will assist you in reviewing the FDD, and provide additional coaching while you are getting established as a new franchise owner. In the meantime, the following information will help you understand more about the Franchise Disclosure Document.
The Purpose Of The Franchise Disclosure Document
The Franchise Disclosure Document describes the relationship between the franchisor and the franchise buyer. It also provides the franchise buyer with all of the information needed to begin to understand the franchisor and what they are actually offering. In essence, the FDD provides a basis in which the franchise buyer can begin to perform their due diligence.
The Purpose Of The Franchise Agreement
The Franchise Agreement is a written, binding contract between the franchisor and the franchise buyer. In essence, the Franchise Agreement legally governs the relationship between the franchisor and the franchise buyer. This document defines exactly what the franchisor expects from the franchise buyer in running the business. The Franchise Agreement is created to guarantee that all franchisees within a particular organization are treated equitably. In addition, expectations must be consistent throughout the entire system. Often times, franchise buyers fall into the trap of signing the Franchise Agreement without truly understanding it, or even reading the document in its entirety. Working with an experienced business broker will help you to avoid this. It is worth noting that most franchisors will require a new franchisee to provide a personal guarantee. A personal guarantee makes the individual franchisee personally accountable to the terms of the Franchise Agreement even if the franchisee operates the business through a separate franchisee entity such as a company or trust. After the franchisee signs the guarantee, they may have a claim over the franchisee’s personal assets, such as a mortgage. Although this can be alarming for most franchisees, it is an item that can be negotiated. That being stated, there are many cases where the personal guarantee is non-negotiable. If the franchisee feels strongly that purchasing the franchise is still in their best interests, the personal guarantee should not be a deal-breaker. In conclusion, reviewing the Franchise Disclosure Document can be a tedious and overwhelming task. However, it is a critical piece of the franchise-buying puzzle. In fact, the Franchise Agreement can have an effect on your overall success as a new franchise owner. In a world of opportunity, it pays to have a good guide. If you would like to speak with a knowledgeable franchise consultant, contact us for a FREE CONSULTATION today! Get more information on our FAQ page.