Starting a Franchise Business? Don’t Forget to Review These Documents

Documents and Notebooks on Wooden Table

Starting a new business can be a major undertaking. This is even truer when that new businesses is a franchise. Starting a new franchise business has many benefits but usually requires a significant initial cash investment, so proper due diligence should be undertaken. Such due diligence can involve a lot of legal paperwork, making it prudent to have legal assistance during this stage.

Non-Disclosure Agreements and Employee Agreements

Non-disclosure and employee agreements provide valuable protections for a business and its valuable human capital as well. Non-disclosure agreements help protect those business secrets that can be an essential asset to any business’ operations as well as its bottom line. The Coca-Cola Corporation famously hides its secret recipe for Coke. This is the type of protected business information that a non-disclosure agreement can help protect.

Employee agreements can provide bilateral protections, addressing points of concern for the employer as well as the employee. Things such as health benefits, code of conduct, and salary are amongst some of the general parameters that an employee agreement may cover.

Source: https://blog.pandadoc.com/ten-things-to-include-in-an-employee-contract/

Both of these documents are legally binding contracts and can have important terms which might impact how a franchise operates on a daily basis. Sometimes, these documents can be complex and full of legalese. Therefore, it is a good measure to have an attorney help review these documents before entering into a franchise agreement.

Organizational Structure and Associated Documents

Another important consideration when deciding whether to start a franchise business is the organizational structure of this new or existing business. Chances are that it is not the simplified sole proprietorship or partnership organizational structure. Due to the complexity and sophistication of a franchisor-franchisee relationship, the proposed new franchise business is likely to have a more complex organizational structure, like that of a corporation or a hybrid entity (i.e., a limited liability company (LLC), limited partnership (LP) or professional corporation (PC)).

The organizational structure of the franchise can have major implications on various aspects of the business. For example, the organizational structure may be optimized for tax and/or liability minimization. However, the franchise agreement may require something different from what may be optimal for the potential new franchisee. Legal assistance may be required in these instances, as well as for thorough review of operating agreements or bylaws involved, in order to help the new franchise business get up and operating on the best foot possible.

Source: https://online.pointpark.edu/business/types-of-organizational-structures/

Franchise Disclosure Document (FDD)

Another important and legally dense document to consider when exploring starting a franchise business is the franchise disclosure document (FDD). The FDD is an important document to review before entering into any franchising agreement. All franchisors are required by the Federal Trade Commission to provide a copy of their current FDD to every applicant no less than 14 days before the sale of the franchise. The FDD contains 23 mandatory sections that provide candidates with information regarding costs and fees, legal issues, turnover rates, and more.

Source: https://www.franchisegator.com/articles/the-importance-of-the-fdd-11046/

Tax Returns

Tax returns are legal documents that can greatly assist a potential franchisee in examining a new franchise business. These returns give a great financial look into the operational history of an existing franchise business. Tax returns are legal documents because they actually require the filer to affirm that the information is true and correct as filed. Any potential franchisee should take it as a red flag if a current business owner is unwilling to provide the business’ tax documents for the previous five to 10 years. This, too, is another area where an experienced business attorney can provide insightful help. Such help can save a potential franchisee from a lot of pain and suffering in the long run.

Source: https://www.patriotsoftware.com/accounting/training/blog/how-file-small-business-tax-return/

Deciding whether to start a new franchise business can be an exciting time for any individual or group. However, due diligence has to be conducted in order to properly evaluate any new business opportunity. The old saying is that a good lawyer is worth their weight in gold, and a good lawyer should be engaged to help you navigate through the franchising process.

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