This is the second in our ongoing new series of short articles about the “basics” of franchising. In this series, we briefly offer practical information addressing some of the fundamental issues concerning franchising. This series is intended to answer and de-mystify some common questions frequently posed to us by prospective franchisees and franchisors.
Broadly speaking, the process for purchasing a franchise starts with applying to the franchisor for approval, receiving a disclosure document, and then preparing to sign the franchise agreement. Below are some of the documents typically required for each step.
Applying to purchase a franchise is like a combination of applying for a job and applying for a loan. The franchisor will want to see your resume to know you have the business skills to run the franchise, and will be interested in your financial position, which may involve a credit report and detailed disclosure of your assets and liabilities, to know you can make the necessary investments in the business.
The disclosure document:
If the franchisor is interested in selling you a franchise, it should provide you with a disclosure document. Despite the size of this document, it should be read completely and carefully. It should include the franchise agreement the franchisor wants you to sign and any lease agreement concerning the premises out of which you will be conducting business. The disclosure document should also provide details such as the estimated cost of opening the franchise, a list of current franchises with their contact information, a description of the support the franchisor will provide to you, and a breakdown of the initial and ongoing fees you will need to pay the franchisor.
This is when it becomes very important to seek the advice of a franchise lawyer. Disclosure documents will typically be hundreds of pages long, and are required to comply with franchise legislation. A franchise lawyer will be able to explain the advantages and risks of becoming involved with the brand based on the content of the disclosure document, can recommend changes to the franchise agreement to strengthen your position, and can educate you about your remedies if the disclosure document is deficient.
Preparing to sign:
Prior to signing the franchise agreement, most people choose to create a corporation for the purpose of running their new franchise. Some brands even require this. In most cases, the brand will want to see the articles of incorporation for your new corporation.