Six Tips for Conducting Due Diligence When Buying a San Diego Franchise
Franchising is big business. According to data from the International Franchise Association (IFA), in 2016, there were about 732,800 franchise businesses across the US employing over 7.5 million people and producing an estimated $675 billion in revenue. Almost one-third of franchises are in the restaurants and food service sectors, but there has been tremendous growth in the last decade for healthcare-related franchises such as elder/nursing care, home-based healthcare, and targeted in-home periodic medical care/testing. Franchising is expected to continue its growth.
We here at San Diego Corporate Law have the experience to help if you are in the market to buy a franchise. Buying a franchise can be an exciting, relatively easy way to start your own business and join millions who are “their own boss.”
However, as with buying any business, you must do your due diligence prior to purchase. Here are six tips for doing your due diligence.
San Diego Franchise Law: Make Sure the Franchise is Registered Under California law
Under California law, every person or business who is a franchisor must register the franchise. The “franchisor” is the person(s) or corporations who own the “master” business, trademarks, and business model. If the franchise is not registered in California, then under no circumstances should you as a franchisee purchase or otherwise become involved until the registration is completed.
San Diego Franchise Law: Ensure You Have ALL the Franchise Disclosure Documents
Under both federal and California laws, the franchisor must provide you with an extensive list of disclosures IN ADVANCE of asking you to sign the franchise agreements. In general, a franchisor must disclose
- Terms and conditions of the franchise
- Financials of the franchisor and any “parent” company that provides product
- Information with respect to standard/expected costs of running the franchise information
- Product sourcing information
- Past performance standards
- Information with respect to level of control authorized under the franchise agreement
- Franchisor discipline, termination and litigation history with respect to franchisees
- Contact information for a franchisee to independently verify the information
- And more
San Diego Franchise Law: Read the Disclosure Documents Carefully
In the excitement of starting your own business, sometimes new owners forget to read everything or they are intimidated by the sheer number of pages. Do not make that mistake.
San Diego Franchise Law: Hire a Trusted Lawyer to Read the Disclosure Documents
While you read the disclosure documents, you should have your trusted franchise law attorney read them. Your lawyer can provide key advice and information.
San Diego Franchise Law: Seek Legal Advice Regarding the Franchise Agreement
The key document in any franchise purchase is the franchise agreement. It is important to have an attorney review the franchise agreement. The franchise agreement sets out the terms and conditions of the franchise relationship and there are many legal issue to consider with respect to various provisions. Key terms to review include:
- Length/term of franchise and renewal terms — you are planning to invest energy and money into your franchise; you want to have a long-term investment; seek advice and counsel
- Geographical location/territory and any rights or protections for your territory (if any) — having a unique and exclusive territory is often important to success
- Renewal conditions — you want to make sure that your franchise cannot be terminated at the whim of the franchisor; seek advice and counsel
- Transfer conditions — you might want to/need to sell; you do not want unreasonable restrictions
- Termination rights — you may need “out” so, how can you terminate the franchise? Conversely, what are the conditions under which the franchisor can terminate you?
- Franchisor’s obligations with respect to advertising and promotion
- Franchisee obligations to assist or participate in promotions — often a large area of contention
- Control and management issues — can the franchisor interfere with management decisions? how much micro-management does the franchisor undertake? Etc.
- Required standards and specifications for the franchise
- Purchasing requirements — often franchisees are required to purchase goods from the franchisor; often such are premium priced compared to the open market; seek advice and counsel
- How much reporting is required?
- Insurance requirements
- Initial and ongoing training
- Dispute resolution
- And more
San Diego Franchise Law: Avoid Personal Guaranties
Sometime, a franchisor requires that the owners of a new franchisee sign personal guaranties or otherwise pledge personal assets. This is definitely something you would want to discuss with your attorney to determine the best way to protect yourself and your assets.
Contact San Diego Corporate Law
For more information, contact franchise law attorney Michael Leonard, Esq. of San Diego Corporate Law by email or by calling (858) 483-9200. Mr. Leonard has the experience to help with the purchase (or sale ) of a San Diego franchise.