Franchise Liability: What Do You Need to Know?

Entrepreneurs starting a business will need to take measures to protect against various liabilities in regards to financial, operational, legal, and risk management matters. The same thing goes for a franchise owner. Franchise liability refers to the legal responsibility and potential legal risks that an individual takes on when buying a franchise. It’s important to understand these liabilities so that you can take steps to mitigate them and protect yourself as a franchise business owner.  

6 Way to Protect Yourself When Buying a Franchise 

#1 – Thoroughly Research the Franchise 

You should make sure the particular franchise you are buying is set up to succeed. You want to ensure the franchise has a solid reputation, maintains good financial health, and promotes the success of their franchisees. Part of the research process includes understanding how much training and ongoing support the franchisor will provide. 

Most franchises offer “Discovery Day”, which gives potential franchisees the opportunity to see the franchise operate in-person. You should definitely take advantage of this experience and make sure to ask plenty of questions while you’re there.   

You should also thoroughly review the Franchise Disclosure Document (FDD), which is a legal document that provides comprehensive information about the franchise system including the franchisor’s background, financial history, franchisee obligations, copies of contracts and agreements, and more.  

Ultimately, it’s better to avoid purchasing a franchise if you can’t rely on its network or if the franchisor won’t help set you up for success. 

#2 – Fully Understand the Franchise Agreement 

The franchise agreement is the contract between a franchisor and franchisee that lays out the terms of the relationship and expectations of both parties. If you sign this document, then you are liable to uphold the agreement’s terms and conditions. It’s important to understand your obligations as well as limitations outlined in the agreement. In most cases, it’s helpful to seek legal advice before signing a franchise agreement. A franchise attorney is an expert in franchise laws and can help you understand the legal issues that come with buying a franchise. 

#3 – Connect With Current Franchisees 

This step can be completed when you are researching the franchise. It’s essential to get firsthand experiences of both former and existing franchisees. They can offer good reviews while explaining their challenges with the franchise system. Other questions you’ll want to ask include the level of support they’ve received and the financial success of their business. It can also be helpful to visit a currently operating franchise to gain insights on the day-to-day operations and have face-to-face conversations with franchisees. 

#4 – Complete Financial Due Diligence 

Buying a franchise is a major financial decision that shouldn’t be taken lightly. Not only do you need to meet the minimum requirements for liquid capital and net worth, but you will also be responsible for the initial franchise fee, all startup costs, and any ongoing franchise fees. You need to have a clear understanding of the financial commitment you are making so you don’t get stuck in a situation where you are liable for not holding up your end of the agreement. Make sure you understand and are fully prepared for the startup costs, ongoing fees, and any profitability goals. 

#5 – Seek Professional Guidance 

It’s not worth going it alone when there are legal liabilities to consider. It’s better to hire legal professionals so that you make an informed decision. A franchise lawyer will help you understand all the legal implications and ensure your rights are protected. A financial advisor with franchising experience can help you assess your financial situation and all of the costs involved in buying a franchise. 

#6 – Talk to a Consultant 

In addition to the legal and financial professionals that can help, FranNet offers services that are key to making an informed decision. Our expert franchise consultants can match you with the right franchise opportunity while guiding you through the process from start to finish. Even better, this comes at no cost to you!

Ready to Start Researching the Franchise Buying Process?

All franchise ownership opportunities will come with certain legal liabilities, but don’t let that stop you from becoming a franchise owner. The important thing is that you do your due diligence to be financially prepared and understand your obligations as a franchisee. Contact FranNet to schedule your free consultation today!  


Dec 29, 2023