What You Don’t Know Can Hurt You
“Why do I have to get a lawyer to review the franchise documents? I am not allowed to change anything anyway.” We’ve heard that more than a few times. The question is quite reasonable.
First of all, let’s dispel the myth that franchise documents are not subject to change. Yes, franchisors are usually reluctant to change their documents. However, a lot depends on the franchisor, the maturity of the system and the nature of the change. Therefore, you should not automatically assume that the franchise documents are written in stone.
Buying a franchise, especially a franchise in a well-established, successful system, is no small investment. In addition to investing your money, you will also invest your time and effort (which are things that you can never get back). Accordingly, it is vitally important that you understand what you are getting into.
You are probably aware that typically buying a franchise may involve paying the franchisor some upfront money followed by an ongoing royalty. You likely also know that there are some rules that you, as a franchisee, must follow, such as how to dress at work, what key phrases to say, how to decorate your store front, what types of products to sell, and so on. However, you might not fully appreciate the legal and practical implications in the franchise documents.
Many franchisees are surprised to find that even though they are incorporated, the franchise documents that they sign make them personally liable to the franchisor and the landlord. Others are frustrated at the level of restrictions imposed by the franchisor, from what supplies to buy, to whom you can buy from (even if you know you can get the same supplies cheaper elsewhere). Some discover years later that in order to sell their franchise to someone else, not only must the potential purchaser be approved by the franchisor; a significant transfer fee must be paid to the franchisor in order to effect the transfer. Some franchisees who own more than one franchise in the system are stunned when the franchisor holds their successful franchises liable for the defaults of their less than stellar franchises, even though the franchises are owned by separate corporations.
Did you know that, as a franchisee, you could be in breach of your franchise agreement if you give advice or lend assistance to your buddy who is operating a competing franchise? Did you know that you could be required to pay rent on your leased premises even if (through no fault of your own) it was damaged to the point that you cannot operate your business from it? Do you know the real difference between arbitration, mediation and just going to court? What in heavens is an indemnity anyway?!
In provinces where there is franchise disclosure legislation, there are certain statutory rights and obligations that apply to you as a franchisee. Do you know what rescission is and when can you use it? What qualifies as a material fact? Is there an obligation on you to deal fairly with the franchisor? If so, what does that actually mean?
Those are just a handful of the many things that a legal review should help you understand (or understand better). In a nutshell, the reason you would get a lawyer to review the franchise documents is so that you, as a potential franchisee, can gain a better understanding of what you are actually buying, thus enabling you to make a well-informed business decision.
Even if you are so enamored by a franchise system, such that you are going to buy the franchise no matter what the franchise documents say (and we have seen a few of those brave souls), you could still benefit from understanding what you are getting into. That way, you can plan your affairs to protect yourself and your family (as much as possible), in the off chance that your dream of a franchisee empire does not materialize. A lawyer can help you with that planning as well!
Closely related to the topic at hand is the issue of legal fees. Most people cite legal fees as the top reason for their reluctance to have the franchise documents reviewed by a lawyer. Legal fees for reviewing franchise documents vary substantially. There are lawyers who charge a few hundred dollars, and those who charge several thousand dollars. We cannot say with any certainty that a lawyer who charges more will do a better job than one who charges less, or vice versa.
Some people think that they can save money if they simply ask a lawyer to look at a clause here and there in isolation. In our opinion, any lawyer who will do that and tell you what the clause means and how it affects you in your particular situation, without reviewing the context and the agreement from which such clause is found is not doing you any favours.
Given the size of a typical package of franchise documents, the job of meeting with you, reviewing the franchise documents thoroughly and properly reporting the findings to you, will take more than a few hours. The critical thing is to retain a lawyer who has experience in reviewing franchise documents. Beyond that, the value of the legal review is ultimately a personal one.
What is having the information that you need to make a wise business decision worth to you?
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