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10 Legal Tips For Buying a Franchise Resale

Below are just a few to consider:

1. Read the Franchise Agreement/ Franchise Disclosure Document. You will be as obligated to your franchise agreement as the previous owner was to theirs. You should take the time to read and understand your rights, duties, and obligations as a franchise owner.

2. Make sure the franchisor approves of the transfer. If the franchisor does not approve of the transfer then the entire transaction could be cancelled, leaving you in a much worse position that when you started.

3. Have a valuation of the business performed. When you purchase any business, you should make sure to know and understand the actual value of the business. This many times is different than the asking price and can give you some room for negotiations.

4. Determine why the existing owner is selling. You do not want to buy a business on its way down the drain or one where its location is about to be terrible due to changes in traffic patterns. You should always ask why the franchisee is selling. Many times the owner wants out of the business due to retirement or personal reasons, but find out why.

5. Obtain and review financial statements. Purchasing a business that is not profitable is not a smart move. Request at least the last 3 years financial statements from the seller and review them with your CPA to determine profitability and to look for trends.

6. Talk to other franchisees and the franchisor about the seller. Learn about the seller and the reputation he/she has and the reputation that the actual business has in the system. If you are buying in to business with a bad reputation then you could have an uphill battle fixing it with your fellow franchisees and the franchisor.

7. Pay the transfer fee. Most franchisors require that a transfer fee be paid to them to cover their costs in evaluating the transfer and you, as the buyer. Either you or the seller must make sure this fee is paid.

8. Analyze the franchisor. Once you purchase the franchise, you will become a franchisee and subject to the rules and responsibilities imposed by the franchisor. Just like the seller did initially, you should conduct your own investigation of the franchisor.

9. How long is your term. When you purchase the franchise, are you purchasing the remaining years in the term or are you purchasing a new term?

10. Have a franchise attorney review the agreements. Purchasing a franchise, even an existing one, involves various areas of law that many attorneys not familiar with franchise law may miss or may deem absurd. Have a franchise attorney draft and review all the franchise agreement and purchase agreements before you sign.

These are just a few of the tips that go along with buying an existing franchise. For more information, contact Shelton Law & Associates.

The material contained herein is provided for informational purposes only and is not intended to constitute legal advice. The quality, timeliness, accuracy or completeness of any information herein is provided “as is” without representation, warranty or condition of any kind. All liability in respect of such information is disclaimed. Do not rely upon the information or apply it to your situation without first consulting an attorney.

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