As a lawyer to the franchise industry, I hear from franchisors
and franchisees alike more often when they are having a problem
with one another than when they're not. As a result, it
can be easy sometimes to overlook all the benefits of franchising
and the mutual success that a franchise relationship can
It is always important, therefore, for franchisors to carefully
screen franchisee candidates in as many ways as are possible (and
legally permissible) in order to determine how viable a prospect is
for long-term achievement within the system. During the
courting and application processes, franchisees should be
evaluating the eligibility of franchisors for business a business
relationship as much as the franchisor is evaluating them, however,
most often the franchisor is the party with the checklist, and the
criteria which have to be satisfied.
In particular, franchisors should not be afraid to ask (and
franchisees should expect to answer) specifics about the
prospect's business and personal background, including prior
employment experience, prior salaries, past and current business
interests and net worth. That list of assets and liabilities
can be a sensitive area, and may also be used to ascertain who
among the operators of the individual franchise may be required to
personally guarantee the franchisee's obligations under a
Franchise agreements can be signed by a company, or by an
individual who will then assign his interest in the agreement to a
company once it gets incorporated. Either way, the
overwhelming majority of franchises are operated by a corporate
entity, with its obligations personally guaranteed by its officers,
directors and/or principal shareholders. Franchisors should
insist that any such company be newly incorporated so as not to
have the franchised businesses become co-mingled with other assets
and, importantly, liabilities incurred by that company
previously. It is also recommended that the company restrict
itself in its incorporating documents from operating any other
business apart from the franchised business.
And franchisors should also reserve a right for themselves in
the franchise agreement to review (and even approve) a
franchisee's shareholders agreement so that it understands who
it will be dealing with primarily, and the various buy-out
arrangements which that franchisee has come to terms with among its
various shareholders. Franchisors may also want to reserve
the right to approve of any sources of financing for the
franchisee. Some franchisors feel that the less they know the
better, but being wilfully blind to an illicit source of funding
for the franchised business could potentially come back to
Franchising at its best produces long-term, successful and
mutually beneficial relationships. Whether you are a
franchisor or a franchisee, make sure you know and understand who
you're dealing with on the other side of that contract so that
you can both best achieve that end.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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