Key Legal Questions To Ask
What entities and/or individuals will be responsible for
performance of various obligations under the contract? If the franchisee is a
corporation, will a personal guarantee be required, and if so, what obligations
are covered? If the franchisee will execute the contract as an individual, does
he or she have the right to assign the franchise to a corporation that he or she
owns? What restrictions are there on other activities of the franchisee, the
relatives of the franchisee and their family members (such as ownership,
employment or other participation in businesses that might be competitive)? Do
the restrictions conflict with any current or foreseeable activities or business
interests of the franchisee or family members affected by the franchise
agreement?
If the business is location sensitive, has the location been
selected? If not, who is responsible for site selection? Is the grant of
franchises contingent upon the franchisee being able to obtain and maintain a
lease for the selected location? Does the franchisee have a right to relocate in
the event of condemnation, lease expiration, or poor business results, or is
relocation a matter of the franchisor's then-current policy?
Is some type of territorial exclusivity included in the
contract or critical to the business? If so, what is the exact nature of any
exclusivity or protection granted? Is it contingent upon conditions, such as
achieving certain performance levels?
These should usually be reviewed closely when a franchise is
being acquired from a new franchisor or from a franchisor who does not have its
trademark federally registered. What type of trademark protection has the
franchisor sought? Is it likely to encounter any conflicts with its marks that
could affect the franchisee? Does the franchisor have the right to require the
franchisee to change its mark, in the event a problem arises with the
franchisor's mark, or if another chain acquires the franchise system?
Have any representations been made by the franchisor on which
the franchisee is relying or which are critical to the franchisee's business
plan? Are these covered adequately, or at all, in the contract?
Is the franchisee relying on the ability to renew the
franchise? Under what conditions might the franchisee not be permitted to
renew-e.g., loss of the lease for the premises, failure to achieve minimum
performance levels, franchisor's determination not to have a unit at the
franchisee's location?
Is there a provision setting out the procedures and
circumstances under which the franchisee is permitted to terminate the franchise
contract? Can the franchisee terminate other than for cause? Under what
circumstances can the franchisor terminate? What will happen to the franchisee's
lease for the premises of his business, and to the assets of the business upon
termination? Does the franchisor have an option to purchase the franchised
business in the event of a termination or expiration? If so, under what
conditions can it exercise the right to purchase? Does the franchisor have the
option or the obligation to purchase any or all assets of the business or to
take over the lease for the location upon termination? Are the franchisee's
obligations following termination or expiration such that the franchisee will be
able to pursue other employment or business interests without undue hardship?
If the success of the business is largely contingent upon the
franchisee's ability to obtain a certain type or quality of product, and at an
economic price, what types of arrangements does the franchisor now have for such
supply? What types of factors could affect the franchisee's ability in the
future to obtain essential goods economically from a reliable source? What
restrictions are placed on the types or brands of goods to be purchased by the
franchisee and the suppliers from whom the franchisee can purchase goods? Does
the franchisee have the right to obtain alternate types or brands of products or
to use other suppliers, and under what circumstances?
Is the franchisee permitted to transfer interests in the
franchise? What conditions or restrictions are placed on transfers of the
franchise and of majority or minority ownership interests in the franchise? Does
the franchisor have a right of first refusal with respect to proposed transfers,
and if so, what types of transfers does it apply to (e.g., majority ownership
interests or sale of business, transfers to family members or among existing
owners)?
