How to Buy a Franchise: Legal Considerations Every Buyer Should Know

Buying a franchise is different from buying an independent business. You're not just acquiring assets and customers. You're entering a legal relationship with a franchisor that governs how you operate, what you pay, and under what circumstances you can exit.

The Franchise Disclosure Document (FDD) is the single most important document in a franchise purchase. Understanding it, and the franchise agreement that follows, is essential to knowing what you're actually signing up for.

Early takeaway: For most first-time franchise buyers, start with FDD Items 5, 6, 17, and 19, then call current and former franchisees before you sign anything.

Franchise vs. Independent Business: Key Differences

When you buy an independent business, you're buying the right to run that business however you want. When you buy a franchise, you're buying the right to use someone else's brand, systems, and processes under their rules.

Neither is inherently better. But you need to understand the trade-offs before committing.

The Franchise Disclosure Document (FDD)

Federal law (the FTC Franchise Rule) requires franchisors to provide a Franchise Disclosure Document to prospective franchisees at least 14 days before any money changes hands or binding agreements are signed.

The FDD is typically 200-400 pages and contains 23 required items. Here are the ones that matter most to buyers:

Item 3: Litigation History

Lists all lawsuits involving the franchisor and its officers. A long litigation history, especially disputes with franchisees, is a red flag. Look for patterns: are franchisees suing over broken promises, territorial encroachment, or unfair termination?

Item 5: Initial Fees

The franchise fee (often $25,000-$50,000) plus any other upfront costs. Understand what's included and what costs extra.

Item 6: Ongoing Fees

Royalties, advertising contributions, technology fees, training fees, and any other recurring costs. Calculate the total ongoing cost as a percentage of revenue. This is money that comes off the top before you pay yourself.

Item 7: Estimated Initial Investment

The full range of startup costs including buildout, equipment, inventory, and working capital. Pay attention to the high end of the range, not just the low end.

Item 12: Territory

Does the franchise agreement give you an exclusive territory? How is it defined? Can the franchisor open company-owned locations or allow other franchisees in your area? Territorial encroachment is one of the most common franchisee complaints.

Item 17: Renewal, Termination, and Transfer

This is arguably the most important item for long-term planning:

• Renewal: Is renewal automatic? Can the franchisor impose new terms at renewal? Do you have to pay a renewal fee?
• Termination: Under what circumstances can the franchisor terminate your franchise? How much notice do they have to give?
• Transfer: If you want to sell the franchise, what restrictions apply? Does the franchisor have a right of first refusal? Must the buyer meet the franchisor's qualifications?

Item 19: Financial Performance Representations

If included (it's optional), this section shows financial performance data for existing locations. If the franchisor doesn't include Item 19, ask yourself why they're not sharing financial data.

Item 20: Outlets and Franchisee Information

Shows how many locations opened and closed in the last 3 years, plus contact information for current and former franchisees. Call them. Talking to existing franchisees is the best due diligence you can do. Ask about profitability, franchisor support, and what they'd do differently.

Where Most Buyers Should Start

If you want a practical order of operations, use this sequence:

The Franchise Agreement

The franchise agreement is the binding contract between you and the franchisor. Unlike most business contracts, franchise agreements are typically non-negotiable. The franchisor uses the same agreement for all franchisees.

At Surge Business Law, we review FDDs and franchise agreements as part of our flat-fee franchise buyer service. If you already have an FDD in hand, that is a good place to start.

Key provisions to understand:

• Term: Typically 5-20 years. What happens at the end?
• Operating standards: Detailed requirements for how you run the business. Violation can be grounds for termination.
• Supplier restrictions: Are you required to buy from approved suppliers? At what price?
• Non-compete: Most franchise agreements include a post-termination non-compete that prevents you from opening a similar business in the same area. Duration, scope, and enforceability vary by state law and facts.
• Dispute resolution: Most franchise agreements require arbitration or mediation, often in the franchisor's home jurisdiction.
• Personal guarantee: Most franchisors require the franchisee to personally guarantee all obligations under the agreement.

Buying an Existing Franchise Location

Buying an existing franchise location (a resale) combines elements of a standard business acquisition with the franchise process:

1. Standard acquisition due diligence: Financial, legal, and operational review of the specific location.
2. Franchisor approval: The franchisor must approve you as a new franchisee. You'll need to complete their application and training requirements.
3. Transfer fee: Most franchise agreements require a transfer fee ($5,000-$25,000) paid to the franchisor.
4. New franchise agreement: You'll typically sign a new franchise agreement under current terms, which may be different (and less favorable) than the seller's original agreement.
5. Right of first refusal: Many franchisors have the right to match any offer and buy the location themselves.

State Franchise Registration Laws

In addition to the FTC's federal requirements, some states have additional franchise registration and disclosure laws. States with franchise registration requirements include California, Illinois, Indiana, Maryland, Michigan, Minnesota, New York, North Dakota, Rhode Island, South Dakota, Virginia, Washington, and Wisconsin.

If you're buying a franchise in a registration state, the franchisor must be registered in that state before selling to you. If they're not registered, the sale may be voidable. That means you could potentially unwind the deal.

Common Franchise Buyer Mistakes

• Focusing on brand recognition only: Strong branding does not offset weak territory or termination terms.
• Underestimating recurring fees: Royalty and ad-fund costs can materially change cash flow.
• Skipping franchisee calls: Item disclosures are useful, but direct franchisee experience often reveals operational reality.
• Signing before legal review: Once signed, leverage drops fast and revisions become harder.

Why Professional FDD Review Matters

The FDD is written by the franchisor's attorneys to protect the franchisor. It's dense, technical, and designed to disclose information without making it easy to understand the practical implications.

An attorney who reviews FDDs regularly can:

• Identify unusual or aggressive provisions that most franchisors don't include
• Flag territorial, termination, or renewal terms that could hurt you
• Compare the FDD to industry norms
• Help you formulate questions for existing franchisees
• Advise on whether the franchise agreement terms are reasonable

At Surge Business Law, FDD review is priced at $750-$950 (member/non-member). Given that the total investment in a franchise is often $100,000-$500,000+, the cost of professional review is a small fraction of what's at stake.

Considering a Franchise?

Book a free consultation if you're actively evaluating a franchise. Bring your FDD, draft franchise agreement, and financial assumptions, and we'll flag high-risk terms and prioritize your next negotiation questions.