Buying a Franchise – Key Issues to Consider Before Investing Your Retirement Money
With the rise of seniorprenuer activity in the last decade, many people in their 50’s and 60’s are looking for alternative places to invest their retirement money. Retirement funds and real estate prove to not only be less secure than expected, but simply not fun and exciting…
Buying a franchise is an easy way to start a business quickly. Many seniorpreneurs turn to franchises, as they do not feel tech savvy, have no time to test ideas and want a winning business.
We are big advocates of franchising opportunities – especially if this would be your first startup; a franchise is a great idea. But, we have seen many people lose their retirement money and end up disappointed and desperate because of not considering the key legal issues of buying a franchise.
We compiled this list because it’s a pity to see people work hard for decades and then just lose it all in a bad investment because of a few legal technicalities.
Key Issues To Consider Before Investing In a Franchise
1. Franchise Relationship
The franchise relationship between buyer and seller is established in the franchise agreement. One of the key legal issues in buying a franchise is making sure you understand your and the your franchisor’s responsibilities.
Before you invest your retirement money, consult a lawyer with the ready agreement (or have them draft one for you). Once you sign the agreement, there is no going back.
Signing the agreement without fully understanding it is a very common reason for franchise failure. Know what you get for your money!
2. Code of Conduct
Not all matters of the franchise relationship are governed by this agreement. Many parts of it are defined by the Code of Conduct which is a legally binding document regarding the behaviors of both sites of the deal.
The Code of Conduct can be found here.
Your franchise lawyer is well familiar with the code, but it is a good idea to skim through it before taking the decision to buy any kind of franchise. The code might define what will happen to your investment in case of disputes and claims and that’s really crucial when you invest your retirement money.
3. Full Disclosure
The franchisor is obliged by the code to present any buyer in a timely manner (14 days before anything is signed) with a Full Disclosure Document (FDD). The FDD contains all information relevant to the purchase and management of the franchise including territorial and business decision limitations, projected earning, financial statements, etc.
It is important to know that if all material facts are not disclosed in this document, this can be a reason for termination of the relationship. In any other case of misconduct, your lawyer can give you advice on protecting your assets and your rights.
4. Support
Even though the role of the franchisor is well established in the franchise agreement, many franchisors fail to provide the ongoing support and guidance they have promised during negotiations.
If you are investing your retirement money in a franchise, make sure that the relationship doesn’t end with the purchase and that how and when the franchisor will assist you is specified in the agreement.
Making sure that the franchisor is on your side along the way can be crucial for building a successful franchise business. In addition, it is a legal responsibility that can be enforced if present in the agreement.
Bottom line of buying a franchise is 1. Getting an experienced lawyer to help you and 2. Doing your research and homework in advance.
If you have managed those two well, you are set for a great business and franchise experience – an investment that will be fun and enrich your life…And who knows, this franchise you just bought might turn into a prospering family business.
Did you find this article useful? What are some of the things that bother you in the franchise contract? We would love to hear from you in the comments box below.
And, of course, if you ever decide to buy your own franchise and want to make sure everything is okay, just contact us here.
The Franchise Agreement and the Full Disclosure Document are the two documents that define the franchise relationship. We include basic examples of their contents here:
The Franchise Agreement includes information about:
– the operating system
– products and trademarks
– competition and territory
– standards and procedures
– detailed responsibilities of the parties
– duration of the agreement
– payments and dividends
– termination policy
– transfer policy
– advertising
– support and training
The FDD includes information about:
– the franchisor
– the company’s key staff
– management’s experience in franchise management
– franchisor’s bankruptcy and litigation history
– initial and ongoing fees involved in opening and running the franchise
– required investment and purchases
– territory rights
– responsibilities of the franchisor and franchisee
– other franchisees in the system with contact information
NOTE: There is a “14-day rule.” For the FDD in which the franchisor gives the franchisee time to cool off and re-think the offer.