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5 Legal Considerations for Buying a Franchise

By Andrew Lu | Last updated on

Buying a franchise may be a great way to start your own business. You have the advantages of starting a business with a recognizable name and built-in customer base.

However, there may also be a lot of downside and risk with purchasing a franchise. This can start with the franchise fee and all the restrictions stated in the franchise agreement.

Before rushing out and buying a franchise, you may want to keep these five legal tips handy:

  1. Study the Market. Is your area ready for another franchise of the same name? Are there lots of competitors nearby? Do your homework and due diligence by surveying the area where you want to open the franchise. You may also want to ask the franchisor if they will sell more franchises near you.
  2. Read the Franchise Contract Carefully. The franchise contract sets out all the terms and obligations of your franchise relationship. Some contracts can be very strict and limit everything from the types of napkins you use to the number of pickles that go in a bun. Other contracts provide more leeway and really only license the name of the company.
  3. Know the Franchisor’s Financial History. Look at the recent history of the franchisor and whether they earn a profit. If they can’t earn a profit, it may be hard for you to turn one also. Also look for any financial data on other franchisees and what their profits and losses were.
  4. Watch out for Hidden Costs. Franchisors often make money from hidden costs to their franchisees like overpriced napkins and pickles.
  5. Get help from a legal plan. Entering into a franchise agreement is a serious legal commitment. If you are not familiar with reading and understanding business contracts, you may want to use a legal plan like LegalStreet to help you review the franchise agreement and make suggestions. For only $19.95, you can have a qualified attorney in your area review the relevant forms and documents.

(Disclaimer: FindLaw and LegalStreet are owned by the same company.)

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