Key Legal Questions To Ask
Personal Liability and Obligations of Franchisee and Family Members
What entities and/or individuals will be responsible for performance of various obligations under the contract? If the franchisee is a corporation, will a personal guarantee be required, and if so, what obligations are covered? If the franchisee will execute the contract as an individual, does he or she have the right to assign the franchise to a corporation that he or she owns? What restrictions are there on other activities of the franchisee, the relatives of the franchisee and their family members (such as ownership, employment or other participation in businesses that might be competitive)? Do the restrictions conflict with any current or foreseeable activities or business interests of the franchisee or family members affected by the franchise agreement?
Location and Marketing Area
If the business is location sensitive, has the location been selected? If not, who is responsible for site selection? Is the grant of franchises contingent upon the franchisee being able to obtain and maintain a lease for the selected location? Does the franchisee have a right to relocate in the event of condemnation, lease expiration, or poor business results, or is relocation a matter of the franchisor’s then-current policy?
Is some type of territorial exclusivity included in the contract or critical to the business? If so, what is the exact nature of any exclusivity or protection granted? Is it contingent upon conditions, such as achieving certain performance levels?
These should usually be reviewed closely when a franchise is being acquired from a new franchisor or from a franchisor who does not have its trademark federally registered. What type of trademark protection has the franchisor sought? Is it likely to encounter any conflicts with its marks that could affect the franchisee? Does the franchisor have the right to require the franchisee to change its mark, in the event a problem arises with the franchisor’s mark, or if another chain acquires the franchise system?
Omissions from the Franchise Agreement
Have any representations been made by the franchisor on which the franchisee is relying or which are critical to the franchisee’s business plan? Are these covered adequately, or at all, in the contract?
Is the franchisee relying on the ability to renew the franchise? Under what conditions might the franchisee not be permitted to renew—e.g., loss of the lease for the premises, failure to achieve minimum performance levels, franchisor’s determination not to have a unit at the franchisee’s location?
Termination and Its Consequences
Is there a provision setting out the procedures and circumstances under which the franchisee is permitted to terminate the franchise contract? Can the franchisee terminate other than for cause? Under what circumstances can the franchisor terminate? What will happen to the franchisee’s lease for the premises of his business, and to the assets of the business upon termination? Does the franchisor have an option to purchase the franchised business in the event of a termination or expiration? If so, under what conditions can it exercise the right to purchase? Does the franchisor have the option or the obligation to purchase any or all assets of the business or to take over the lease for the location upon termination? Are the franchisee’s obligations following termination or expiration such that the franchisee will be able to pursue other employment or business interests without undue hardship?
Sources of Essential Products
If the success of the business is largely contingent upon the franchisee’s ability to obtain a certain type or quality of product, and at an economic price, what types of arrangements does the franchisor now have for such supply? What types of factors could affect the franchisee’s ability in the future to obtain essential goods economically from a reliable source? What restrictions are placed on the types or brands of goods to be purchased by the franchisee and the suppliers from whom the franchisee can purchase goods? Does the franchisee have the right to obtain alternate types or brands of products or to use other suppliers, and under what circumstances?
Restrictions on Transfer of the Franchise orOwnership Interests of the Franchisee
Is the franchisee permitted to transfer interests in the franchise? What conditions or restrictions are placed on transfers of the franchise and of majority or minority ownership interests in the franchise? Does the franchisor have a right of first refusal with respect to proposed transfers, and if so, what types of transfers does it apply to (e.g., majority ownership interests or sale of business, transfers to family members or among existing owners)?