How to Open Franchise Agreements

Franchise agreements are legal contracts.

A franchise agreement is a legal contract that outlines the rights and obligations between the franchisor and franchisee. The franchisor is the company that owns the business concept. The franchisee is the individual who is purchasing the franchisor's business idea. Opening a franchise agreement between a franchisor and franchisee varies depending on the type of business, state and local laws. There is not one standard agreement or contract. Individual states regulate most franchising laws. However, the federal government requires certain provisions under the Federal Trade Commission Franchise Rule.

Things You'll Need

• Business capital
• Financial advisor
• Legal counsel

Instructions

1. Conduct extensive research on the types of franchises available in the area. Most franchisors grant exclusive territory rights to each franchisee, meaning that no one else may open the same business within a certain distance.

2. Study state and local business laws that pertain to franchise agreements. Many franchisors are located in a different state than the franchisee, which means the franchisee is obligated by different laws than the franchisor.

3. Ask the franchisor for basic disclosure documents required by the Uniform Franchise Offering Circular (UFOC). Franchisors must file an annual UFOC is each state where they conducted business. The UFOC requires financial and legal transactions including bankruptcies, securities, investments, training and marketing practices.

4. Obtain an attorney who specializes in franchise agreements and business law. Give copies of all documents to the attorney for review before signing.

5. Suggest that the attorney request past and present franchise agreements with other franchisees to inspect for accuracy and congruency. The franchisor should oblige.

6. Seek sound financial advice from a professional who is not associated with the franchisor. The majority of franchisees borrow money for the initial investment and/or operating capital. Understand the financial commitment that accompanies the franchise agreement.

7. Be aware that the franchisor controls almost all aspects of the business. The franchisee is not free to stray far from the original business concept.

8. Compare pros and cons of the franchise agreement and make a decision. Retain the franchise attorney for future agreements or termination of agreements.

Tips & Warnings

• The Federal Trade Commission requires franchisors to provide potential franchisees with basic disclosure documents before entering into an agreement.

• Do not pay the franchisor a deposit or partial payment before the attorney and financial advisor review all documents.

• By law, the franchisor is not required to make earning claims. However, if they do make earning claims, they must provide sufficient evidence in writing to back them up.

References

• American Bar Association