Prospective Franchisee Due Diligence Part 3

This post, and the posts that preceded it (Part 1 and Part 2)and the ones that will follow it, will outline the due diligence that we recommend for prospective franchisees. Ask for a copy of the franchisors franchise disclosure document, and read it thoroughly, noting any questions you have to discuss with your franchise lawyer later. (Yes, I know the document is hundreds of pages long, has been drafted by a lawyer, and can be mind-numbingly dull. No, thats not an excuse for not reading it thoroughly, particularly when your total investment in the franchise will typically exceed $100,000. And no, even if you are paying us to review the franchise disclosure document, franchise agreement, and related agreements, you still have to read them yourself). Most of the provisions in the franchise agreement are unlikely to be negotiable, particularly in the case of more mature franchisors. However, at least in Virginia, by statute, a franchisee may declare the franchise agreement void if the franchisee was not afforded the opportunity to negotiate with the franchisor on all provisions within the franchise, except that such negotiations shall not result in the impairment of the uniform image and quality standards of the franchise, provided that the franchisee send[s] such written declaration within thirty days after execution of the franchise [agreement]. Va. Code 13.1-565(b). In our experience, most franchisors will agree to an addendum clarifying ambiguities in the franchise agreement and incorporating a relatively small number of changes successfully negotiated for by or on behalf of the franchisee. However, franchisors will rarely, if ever, negotiate away key system standards or the uniformity of the franchise system. A non-exclusive list of key points to consider negotiating, and to discuss with your franchise lawyer, include:

• Restricting the amount or duration of personal guarantees
• Timing of unit openings under an Area Development Agreement
• Territorial Protection, including protection against sales by franchisor into alternative venues
• Renewal terms
• Termination provisions, including specifically damages potentially due from a franchisee on termination.

For further information regarding this topic, please contact StephenE. Story at (757) 624.3257 or sestory@kaufcan.com. —Stephen E. Story