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Franchises

Before you buy a franchise : legalities

Buying a franchise opens up a whole world of legal issues; be sure you understand exactly what is involved before you give in to the little voice in your head that murmurs, 'buy a franchise , buy a franchise'.

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First of all, do you need to enlist the services of an attorney? Your own lawyer can help you with the franchise proceedings and so can your accountant. Business and/or financial advisors are always helpful for running the numbers and ensuring that you start off on the right financial foot. Although an attorney is not required, it makes shrewd business sense to seek advice from someone familiar with business agreements.

Franchises are regulated by the Uniform Franchise Offering Circular (UFOC), a disclosure statement that supplies all the information about the franchiser. This includes its financial, ownership and management history. The UFOC is not the same as the franchise agreement (it comes beforehand), and is unique to each franchise.

After receiving the UFOC, the franchisee is legally required to hold on to it for ten business days before signing. The franchisee is also entitled to hold onto the franchise agreement for five days before filing. These protective measures help the franchisee make a firm decision, and reduce the risk of easy persuasion.

The franchise agreement contains a number of legal aspects that must be investigated before a final decision is made. Consider the 'duty of good faith and fair dealing' provision, which prohibits fraudulent intentions. Or the use of a 'general release,' signed upon completion of the term, which places added responsibility on the franchisee.

An 'exclusive territory' measure prohibits other franchisees from setting up shop in your area. Check out geographic limitations in the agreement. Ask about the cost of closing the franchise before your agreement ends - some franchises may hold you financially responsible.

Franchisors may forbid franchisees from joining a franchise trade association; an independent organization that protects the rights of franchisees. Other franchisors may ban the franchisee from entering the industry again if they leave; this helps keep trade secrets safe from competitors.

If you maintain a good relationship with your franchisor, there is always the possibility of renewing your agreement. Most contracts run for 10 to 20 years, but the franchisor can choose not to let you renew at every stage. Double check the terms of the contract as they can change from your original version. Bear in mind that franchisors may also end your business for any breach of contract and you can lose your investment.