FRANCHISE LAW DOCUMENTS

For the same reasons, it is important to inspect all of the legal agreements between franchisor and franchisees, including promissory notes or security or other agreements incidental to any offers by the franchisor to provide special financial or other assistance to potential franchisees, whether entered into when the parties first began doing business together or later on.

The inspection must also take care to uncover all obligations on the part of the franchisor regarding marketing, advertising, training, and other business functions including leases, since these are costs that may be assumed by the buyer and hence should be reflected in the terms of the deal. In some cases franchisors themselves lease property and sublease it to their franchisees, and in others franchisees do the leasing on their own. Whatever the arrangement, the inspection must determine whether the terms of the leases agree with those of the agreement between franchisor and franchisee, and whether third parties – for example, the owners of the property in question – have any rights of approval over lease transfers and other matters affecting the operations of either franchisor or franchisee.

It is often the case that the lawyer will find these and other important records – for example, notices of late payments or default by franchisees, correspondence detailing disputes with franchisees, and records of events surrounding the termination of franchise agreements, which can be acrimonious – in the offices of the franchisor

On the other hand, what the lawyer finds in the offices of the franchisor will sometimes only hint at trouble, making it necessary to expand the due diligence search into courthouses, statehouses, and other repositories of public records, often resulting in a considerable expenditure of time and effort.

In all cases, the lawyer must remember that the goal of the legal due diligence incident to any deal involving a franchise company is to gain a clear picture of the business practices of the franchisor and of the relationships between franchisor and its franchisees, all the while looking for signs of trouble (see sidebar). Thus the due diligence effort must be disciplined and thorough so that all parties to the deal, whether seller, buyer, investor group, or lender, will have a complete picture of the risks and opportunities inherent in the deal and can adjust the terms of a purchase agreement accordingly.

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