So you’re thinking of buying a franchise? Franchises can be good business opportunities; you often purchase a ready-made business model with a built-in reputation. Training, support, and materials are often even provided to you by the franchisor.
But when you buy or are considering buying a franchise, you may be buying blind—especially if you are purchasing a lesser-known franchise. That’s why the law says you must be provided with a list of disclosures before purchasing the business.
The Chicago business law attorneys at Ellis Legal explain more about franchising.
Don’t ignore those disclosures. They say important things, including some of the following.
1. Fees – The cost of a franchise isn’t cheap. For many, there will be a large initial startup fee and recurring fees that will be due for as long as you own the franchise. Some may be a set fee, and some may be based on a percentage of sales.
There may also be fees that cover initial startup expenses, like the cost to purchase equipment needed to run the business. Fees may or may not cover the required build-out for any physical property that you buy or rent. Everything from training, phone/technical support, or marketing may also have fees associated with them.
2. Purchases- When you own a franchise, you can’t just purchase your uniforms, machinery, printing, or inventory from whomever you want. Many franchises will require you to purchase from who they want you to purchase from—even if that’s at a higher cost than where you could get the same items on your own.
3. Obligations – The obligations that you and the franchisor have must be given to you in a chart or table format. For example, who will select the site, who will fix broken equipment, or who will pay legal fees? All should be listed.
4. Competition – The last thing you want is the franchisor selling the same franchise to someone else two blocks from your location. Your agreement will dictate the restrictions on the franchisor competing against your franchise by restrictions on them selling the same business to others within a certain radius of your chosen location.
5. Financing – Some franchisors act as their own lenders, financing whatever you owe them over time. If this is offered, the financing terms must be clearly disclosed to you. Remember that whatever terms are offered may not be as favorable as financing you may get from an outside lender like a bank.
6. Legal liabilities – The franchisor must tell you if it is in any legal problems, whether it is being sued, or what its legal liabilities may be. This, of course, includes bankruptcy but also any other civil claims or government actions being taken against the company.
7. Limitations – Most franchises want things done their way. You can’t buy a Subway franchise and decide to sell pizza or have your employees all wear orange shirts. The franchise agreement will tell you what you have control over and what you don’t.
8. Working – Thinking of buying a franchise and hiring other people to run it? That may work with some franchises—but not all. Your franchise agreement will say whether the franchise expects you, personally, to be working onsite or with the business and how many hours they expect you to be there.
Starting a business? We can help. Speak with a Chicago business law attorney at Ellis Legal at (312) 967-7629 today for any of your business law needs.