What Should I Consider Legally Before Buying a Restaurant Franchise?

Entering into a franchise business is unlike starting one from scratch. Although it can provide turnkey convenience with brand-name recognition, there are many concerns you should examine prior to signing on the dotted line.

Below, a franchise attorney from Luther Lanard provides insight into the question, “What should I consider legally before buying a restaurant franchise?” While we’ll focus on the Dallas-Fort Worth market, these insights will be applicable and adaptable to franchisees nationwide.

Educating Yourself Can Avoid Many Pitfalls When Purchasing a Restaurant Franchise

If you are new to the restaurant business and franchising in general, you have a steep learning curve ahead of you.

Review the Market

You’ll need to review your potential market, whether you have what it takes to commit to the restaurant business, and whether the franchise model is right for your goals. The Federal Trade Commission (FTC) provides a useful Consumer’s Guide to Buying a Franchise that can help you get your bearings.

Speak with Experienced Restaurateurs

You should also speak with experienced restaurateurs to get a full picture of how much work they put in, how they manage finances, and what they wish they’d known when they started. Getting as much information as possible before you purchase a franchise gives you a solid foundation for understanding the more complex legal considerations.

If you’re already a seasoned professional in the food service business, you should still investigate the unique issues associated with franchise operations.

Existing Franchise vs. New Franchise

You’ll also need to consider whether to buy an existing franchise with established performance results or start one in a new market. No matter how you choose to move forward, you should fully understand your primary duties as a franchisee and consult experienced franchise attorneys. Performing extensive due diligence prior to taking action is the surest way to avoid legal jeopardy.

Should You Buy a Stand-Alone Business or a Franchise?

Businesses started by individuals or families can often enjoy significant success, especially in a specific market like Dallas, TX.

A restaurant operating in a single location with a solid customer base can seem attractive, since it’s a ready-made chance to continue sales. Yet you have to consider whether the original owner brought something to the mix that you can also provide, or whether that spark might disappear with a new owner.

Potential Advantages and Disadvantages

With franchise purchases, you get the advantage of an established market, a signature business model, and corporate support. You don’t have to worry as much about building, honing, or expanding your brand, since the primary franchisor handles these issues. They supply what you need to present the product to your customers, and your main focus is running things smoothly and productively.

However, there are potentially more limitations with a franchise compared to a stand-alone business, since you cannot try new offerings or brand approaches that may better suit your customers. You have less flexibility but also greater stability in economic downturns. The Small Business Administration (SBA) provides more detail on what you should consider when weighing the pros and cons of buying a business versus a franchise. 

What to Do Before Purchasing a Restaurant Franchise

Franchising requires a substantial upfront investment, along with ongoing royalties paid to the franchisor throughout your contract. If you buy a stand-alone business, you’ll still have monthly and yearly costs, but they may differ from what a franchise requires. Here is how to prepare yourself before purchasing a restaurant franchise:

• Study the Franchise Model: Educate yourself on how franchises work and the various controls the franchisor requires so you understand the contractual obligations you’ll need to meet.
• Attend a Franchise Exposition: In Texas, the Franchise Expo Dallas and The National Franchise Show (in Dallas) offer a chance to speak directly with franchise owners and associates to give you a better idea of whether this path is right for you. 
• Decide What Restaurant You’d Like to Own: If you’ve always wanted to serve quality meals in a sit-down atmosphere, a fast food franchise may not be right for you. What you ultimately buy may also depend on what franchises are available in your area.
• Research Your Options: Once you identify a few candidates, get as much information about each company as you can. Request a Uniform Franchise Offering Circular (UFOC) from each franchisor and examine their market performance over the previous 10 years to get a better idea of how the company is doing.
• Organize Your Finances: You’ll need more than just the initial franchise fee to succeed, since the franchisor will review your credit history, prior business performance (if any), and other obligations.
• Interview Other Franchise Owners: Ask plenty of questions about what it’s really like to own and manage a franchised restaurant, understanding that they may be unable to share some information to protect trade secrets.
• Consult with a Franchise Lawyer: Even if you haven’t fully decided to begin, speaking with someone who isn’t associated with a company can give you a roadmap of how to proceed when you make your purchase.

Buying a restaurant franchise is like jumping on a freight train already moving at top speed. You’ll find people who are willing to help you on board, teach you about how the train works, but you’ll ultimately be responsible for knowing what you’re getting into before you start. It can be thrilling and rewarding, but only if you come prepared to work hard and use the tools you have for your own success. 

How the Franchise Purchase Process Works in Texas

Once you decide which restaurant franchise to buy, you will follow these general steps:

• Hire an Accountant: You’ll want professional financial advice, and your accountant can help you determine the full costs of buying a franchise. 
• Hire a Franchise Lawyer: Franchise companies have teams of attorneys on their side, meaning you need to have experienced guidance to avoid mistakes. Your franchise lawyers can help you create and review vital documents, including your letter of intent, the franchise agreement, the asset purchase agreement and leases. 
• Obtain a Franchise Disclosure Document (FDD): Franchisors are required to provide Franchise Disclosure Documents, so get a copy for your potential new business partner and read it closely. Ask your attorney and accountant to clarify any concerns.
• Arrange Your Financing: Obtain any necessary loans and organize your existing funds so you are prepared when the sale finalizes.
• Create Your Business Entity: Choose the right business entity for your franchise, whether you want to start an LLC, C-Corp, or S-Corp. 
• Select an Approved Site Location: If you’re building a new restaurant, you’ll usually need to work closely with the franchisor to find a retail location that meets their criteria before you can sign the lease agreement.
• Sign the Franchise Agreement: After a final review, sign the documents with your attorney present, if possible.
• Attend Franchisor Training and Licensing: Complete your start-up training so you fully understand how to begin your business, and attend any necessary licensure classes, such as the Dallas alcohol sales license.
• Obtain Necessary Permits: If your franchisor hasn’t already secured these for you, review the process for any permits required by the Texas Department of State Health Services.

Once you open your doors, you’ll need to maintain regular permit and licensing renewals, along with staying up to date on changes sent down from the corporate owner. You’ll need to meet all existing and new obligations, pay royalties and advertising fees, and follow strict operational guidelines. The benefit is that you get the chance to own and run your own business with a roadmap that supports your ability to grow and profit. 

Specific Legal Concerns When Buying a Restaurant Franchise

Let’s rewind the franchise-buying process and take a closer look at some potential issues from a legal perspective. 

The Franchise Disclosure Document (FDD)

We recommend that you obtain one of these for each candidate franchisor when you begin your search for the right purchase. If you don’t, federal law requires a franchisor to give you their FDD at least 14 days before you sign an agreement with them. 

There are 23 separate sections to the FDD, all of which you should read thoroughly. It will cover matters such as the company’s financial statements, any litigation, investment requirements, background, and management structure. Your franchise law attorney can help you identify any franchise red flags that could cause you to reconsider that company or areas where you need more information before moving forward.

The Franchise Agreement

The agreement will include expectations for both the franchisor and you as a franchisee. It should confirm your rights to a specific market (by zip code and radius), operational restrictions, and any personal guarantees. We often advise against agreeing to open ended personal guarantees without any caps, as you could open yourself to financial liability in litigation.

You have the right to negotiate some of the terms, although your success may vary depending on many factors, including the size of the franchise system. That is when it’s essential to consult with a lawyer who can better manage these conversations to your benefit. 

Location Selection

If you plan to operate within the Dallas area, you’ll need to make a full list of zoning and other ordinances that will apply to your restaurant franchise. For example, you may require a liquor license and a food manager’s certificate. You must follow the City of Dallas guidelines for new or remodeled food and drink establishments and apply for a food establishment permit. Review the city’s current codes and ordinances to prepare for regular inspections.  

Be sure to review Dallas’s land-use area plans to verify that infrastructure changes won’t negatively affect your new business. An experienced franchise lawyer can assist with evaluating a retail location. 

Texas Franchisor Registration

While the state doesn’t require franchisors to register under the Texas Business Opportunity Act, they must file a Business Opportunity Exemption Notice (Form 2703) with the Texas Secretary of State. The corporation must also pay annual franchise taxes to the Office of the Comptroller, which you will do when you own your own location.

As part of your due diligence, you should confirm that the franchisor has submitted its Exemption notice and is current on taxes with the state. If they haven’t, it could signal that you should choose another company as a partner.

Buying an Existing Franchise

Rather than opening an entirely new location, you may prefer to buy an existing restaurant franchise. Similar to our other recommendations, we emphasize doing your homework to find out everything you can about the main company. You’ll also need to investigate the seller to conduct due diligence and determine the location’s performance and why they’re selling. 

Clarify what is included in the sale, such as fixtures, equipment, current inventory, and whether any licenses transfer to you. For example, an alcohol sales license cannot be transferred, so you’ll need to apply for your own. Also discuss which employees are critical for your success, whether the business carries substantial debts, and any other liabilities like subpar HVAC or delivery vehicles. 

Ways Your Franchise Attorney Can Streamline and Support Your Restaurant Purchase

We mentioned that buying a franchise is like hopping aboard a speeding train: ready to move ahead, with built-in support and reward for hard work. Your lawyer can provide services for every aspect of buying and owning a restaurant franchise, including:

• Initial assessment
• Evaluating risks
• Developing your relationship with the franchisor
• Purchasing as a first-time franchise buyer
• Franchise remodels
• Breach of contract
• Deceptive trade practices and violations
• Negotiating commercial leases

Consider that hiring a skilled franchise attorney is like having someone help you choose the right train for you and get you onboard without the stress and frustration. Once you’re there, they stay with you to guide you towards success even more quickly than you can on your own.

Contact a Franchise Lawyer from Luther Lanard Today

While you will also benefit from hiring qualified business counsel, a franchise lawyer differs from a business attorney in important ways. Together, they offer well-rounded recommendations and legal guidance.  At Luther Lanard, our mission is to provide exceptional service to those in the franchise industry, offering deep experience in the field and aggressive representation.

We stand by our results and look forward to speaking with you during a consultation. When you’re ready, contact our franchisee law firm about your restaurant purchase.