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WHAT TO CONSIDER WHEN CONSIDERING THE PURCHASE OF A FRANCHISE (PART 1)

Posted by David Katz | Aug 18, 2019 | 0 Comments

A. THERE ARE MANY FACTORS AND CONSIDERATIONS TO EVALUATE WHEN PURCHASING A FRANCHISE.

The time has arrived for the purchase of a franchise. You are days away from signing on the "dotted line." In fact, as a prospective franchisee you may still have lingering questions about whether this will be the right decision for you. If this is the case, take a step back and consider the following questions to make sure that you are making the right decision:

1. What are the costs involved in this project? More often than not franchisees have a host of additional costs related to opening a franchise other than the franchise fees themselves. There are costs attendant to the purchase of permits, licenses and approvals. There will be costs associated with acquiring leased space. And, of course, each franchisee who is properly prepared for this voyage will know that accountant, consultant and/or attorney's fees are part of the process. You will also be required to purchase insurance. As well, make sure that you review the franchise circular and agreement to drill down on the actual costs of running the franchise. Estimates are generally provided by franchisors based on the most recent information within their franchise system. To this end, make sure that  you do an audit of the franchisor's books and records so that you eliminate any and all surprises.

2. If I have a legal problem with the franchisor can I go into court to protect my rights? The short answer is that it depends. Some franchise agreements require that the parties go into arbitration to resolve all disputes associated with the operation of the franchise. Quite often, there is a waiver by the franchisor of all punitive claims. Keep in mind that by submitting to arbitration you are giving up any and all rights to a jury trial in a court of law.

3. Using trademarks and other intellectual property. When you purchase a franchise you are also purchasing the trademarks that go with the company. This is very important because trademarks, services marks, services names, logotypes and other commercial symbols are what creates an identity for your business in the workplace. As a franchises you must check with the patent and trademark office regarding all existing commercial symbols used by the franchisor. If one of the symbols or trademarks has been rejected or is the subject of litigation that could be a game changer for any franchisee. As a franchisee, you have no inherent ownership of any of the trademarks, symbols, service marks or any other intellectual property of the franchisor. Upon termination of your franchise, you agree to relinquish any claim in this intellectual property.

4. You can never do enough due diligence. Make sure that you review the estimate of costs provided by the franchisor. You should enlist a certified public accountant to tell you if the franchisor has sufficient capital, including binding commitments, to allow it to perform its promised services to the members of the franchise system. This information is crucial both upon joining any franchise system but, also, in the future. If a franchisor is undercapitalized then it becomes more likely that it will sell off parts of the system to another franchisor. What often comes with this transition is confusion among the franchisees due to a change in management which often translates into a change in underlying support to the franchisees.

In our next article, we will review other considerations necessary for every franchisee to consider. When deciding to purchase a franchise, you should call our office. At the Katz Law Group, we have helped many franchisees in achieving their goals. Please call us at 508-480-8202 for further information as to how we can help you.

About the Author

David Katz

Attorney David S.Katz is the founder and managing partner of the Katz Law Group, P.C., located in Marlborough, Massachusetts...

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