Mr. Chapman represents persons who desire to acquire franchises or purchase franchised businesses. He has lectured on “buying a business” for programs presented by the Institute for Continuing Legal Education Lawyers Educational Services, Kean University/Small Business Administration and SCORE (Service Corps. of Retired Executive).
Some important considerations in forming a new business to acquire not only a franchise but an existing business are:
- selecting the form of business organization-limiting liability
- selecting a lawyer competent, not only in franchising, but also in corporate, commercial and real estate law
- identifying the respective due diligence activities for the proposed franchisee and the lawyer
- selecting an accountant to assist in the reparation of cash flow projections, preferably prior to signing the Franchise Agreement
- deciding on whether to have compilation or review financial statements
- use of payroll services-dangers of non-compliance with technical requirements
- shopping around for insurance coverage, rather than blindly using the insurance agent recommended by the Franchisor
Franchise Agreements
Some major issues in reviewing the Offering Circular and Franchise Agreement are:
- refund of Franchises Fee or portion thereof before commencement of operations under certain circumstances
- the “Territory” and scope of protection for the Franchisee
- length of initial term
- right of renewal and conditions thereon
- conditions to right of Franchisee to sell the business with the Franchise or to sell a portion of the ownership
- effect of death or disability of the principal of the Franchisee
- limitation of the liability of the principals(s) on the personal guaranty required by the Franchisor
- limits, if any, on discretion of Franchisor to refuse to grant consents or approvals
- restrictions on competitive activities of the Franchisee of its Principal(s) after termination
Some of the key issues in the Lease for the franchised location are:
- the precise language of the use clause
- length of initial term and synchronization with the initial term of the Franchise
- Tenant’s option to renew security deposit; amount and form
- possible limit to the amount of the personal guaranty
- right of Tenant to assign the lease if it sells its business
- limits, if any, on discretion of Landlord to refuse to grant consents or approvals
- Tenant’s signs subordination of Landlord’s right of distraint to lien of a bank providing financing for the business