New York Franchise Law Blog : Franchise Lawyer & Attorney Charles N. Internicola, Providing National Representation of Franchisees and Franchisors

For the successful business owner considering the franchised expansion of his or her business one critical question that must be answered is "how do you approach the preparation and development of your franchise agreement."  That is, do you "approach" the preparation and development of your franchise agreement (and franchise disclosure documents) as:

(a) A "legal obstacle" that requires the preparation of "generic" agreements and disclosure documents;

OR

(b) A collaborative process focused on the development of a critical "asset" that uniquely reflects, identifies and protects the components of your business (that is what has made your business successful),  franchise, and  franchise system.  

Why do I ask?  Because your approach will determine the ultimate outcome of this important process.  

Approach "(a)" - the "legal obstacle approach" will typically lead to generic  agreements and disclosure documents that, by all accounts, result in little (if any) value to a developing franchise system.  While this approach may satisfy (or appear to satisfy) your regulatory disclosure requirements they do nothing to advance the development of your "franchise system".  That is, approach "(a)" typically leads to "form over substance" and not much else.  When speaking with start-up franchisors that have followed this approach - an approach that they followed with the best of intentions but based on what may be poor advice - I am typically advised that their franchise agreements simply do not work for their business and franchise system.   

For the start-up franchisor, approach "(b)" is the only true option.  By following this approach your franchise agreement and disclosure documents will serve as core business "assets: that will reflect and protect  the unique and critical components of your business and your newly established franchise system.  

When starting a franchise keep in mind that all agreements are not the same and and that your input will be critical to insuring that your agreements and disclosure documensts reflect the unique nature of your business.  This is no easy task and is not one that is not simply delegated - an indepth working relationship with your franchise lawyer is required.

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When purchasing a business or franchise, your lease agreement will serve as one of the most influential factors in determining the profitability of your new business.  In states such as New York and New Jersey where rents are higher, paying particular attention to your rent factor is critical.

When the business that you are purchasing is a franchise, some additional lease agreement "due diligence" factors that you should consider, include:

• Is the Lease a Sublease. Whether or not the lease for the business premises is transferred to you directly (as the purchaser of the business and the new franchisee) or if the lease is held by the franchisor (as the direct tenant) and then to you, indirectly, as a subtenant. This is important because in instances where the franchisor has direct control of the lease, it is possible – if you breach or terminate the franchise agreement – for the franchisor to attempt to “step in” and take over the operations of the business that you are purchasing. Again, this concern only comes about in instances where you breach the terms of the franchise agreement;

• Is there a Lease Management Fee. Whether or not the franchisor charges a monthly lease management fee. This applies mostly in instances involving the franchisor’s sublease of the business location and constitutes, typically, an administrative monthly fee charged to you by the franchisor for being identified as the direct tenant on the lease;

• Restricted Lease Use Clause. Whether or not the leased business location may be converted to a non-franchised business location in the event of a termination of the franchise agreement; and

• Protected Territory. Whether or not the franchise agreement includes a protected territory (i.e., a specified geographic radius or map located within a certain proximity to the business location) within which the franchisor will not sell any additional franchises.

Your lease will serve as one of the most critical business assets that you will be acquiring, so you must get the terms right.  If the business that you are purchasing is a car wash or gas station in New York, Long Island or New Jersey your lease agreement due diligence must also include an assessment of the property for potential environmental conditions.

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